Background On Charles Lienaux's 2019 Business Expense Claims
Charles Lienaux, a chartered professional accountant, claimed $15,436 in business expenses for 2019, primarily related to motor vehicle costs ($11,605), home office expenses ($1,550), and hotel expenses ($1,320). These expenses were incurred in connection with efforts to establish Agkinex Inc., a company incorporated in December 2019 to develop agricultural technology for potato farms in PEI. Lienaux, along with three others, founded Agkinex to pursue precision agriculture solutions, focusing on sensors and technology to enhance farming productivity.
Throughout 2019, Lienaux travelled multiple times from Nova Scotia to PEI to meet with potato farmers and the University of PEI's School of Precision Agriculture, planning field trials for March 2020. He cashed out over $50,000 in RRSPs to fund his living expenses during this period. Agkinex did not generate income, pay salaries, or file tax returns. The planned field trials were cancelled due to the COVID-19 pandemic in March 2020, and Agkinex was involuntarily dissolved in 2022 for failing to file annual reports.
The CRA disallowed Lienaux's claimed deductions, asserting that he was not carrying on any business in 2019, the expenses were not startup costs, and the expenses were not incurred in the course of any business activity during the 2019 taxation year. Lienaux appealed, arguing that the expenses were incurred to start Agkinex and should be deductible as business startup costs.
Core Legal Issue in Determining Deductibility of 2019 Expenses
The central issue was whether Lienaux demolished the CRA's assumption that he was not carrying on a business in 2019, such that the $15,436 in claimed expenses were deductible under paragraph 18(1)(a) of the Income Tax Act as expenses incurred for the purpose of gaining or producing income.
Legal Framework Governing Deductibility of Business Expenses
Paragraph 18(1)(a) of the ITA allows deductions for expenses incurred for the purpose of gaining or producing income from a business or property. The Federal Court of Appeal in Vesuna v. The Queen (2022 FCA 58) established that a business must have commenced for expenses to be deductible, requiring that essential elements of the business be in place. Mere intention or preliminary steps, such as planning or research, do not suffice.
Each case turns on its own facts, but where a taxpayer has taken significant and essential steps that are necessary to the carrying on of the business it is fair to conclude that the business has started. (Gartry v. The Queen, 1994 CanLII 19352).
In Gartry, the court allowed deductions where the taxpayer had taken significant steps, such as borrowing money, purchasing and modifying a boat, securing licenses, and arranging contracts, indicating a business had started when the expenses were incurred.
The CRA's assumptions in reassessments are presumed correct unless the taxpayer provides evidence to "demolish" them.
The Tax Court Determined that Mr. Lienaux Had Not Carried on a Business
The Tax Court of Canada dismissed Lienaux's appeal, finding that he failed to demonstrate that he was carrying on a business in 2019. The court compared Lienaux's actions to those in Gartry, noting that his efforts, such as travelling to meet farmers, planning field trials, and incorporating Agkinex, were preliminary steps that had to be taken before going to market, not the commencement of a business. The field trials, scheduled for 2020, were themselves preparatory, and no income-generating activities occurred in 2019.
Lienaux did not demolish the CRA's assumptions that he did not operate a business as a sole proprietor or partner, that the expenses were not Agkinex's startup costs, and that they were not incurred in the course of business activities. The court acknowledged Lienaux's significant effort and financial investment but held that paragraph 18(1)(a), as interpreted in Vesuna, does not permit deductions for preliminary step expenses incurred before a business begins.
The impact of the COVID-19 pandemic, which halted Agkinex's plans, was noted but deemed irrelevant to the 2019 tax year, as the issue hinged on whether a business existed at the time the expenses were incurred. Consequently, the $15,436 deduction was disallowed, and the appeal was dismissed without costs.
Pro Tax Tip: It is Essential to ensure That a Business has Commenced Before Claiming Deductions
The Lienaux v. The King decision highlights the stringent requirements for deducting business expenses under the ITA. Taxpayers must demonstrate that a business has commenced, with essential elements in place, to claim deductions. Preliminary activities, even if substantial, do not qualify. This ruling serves as a cautionary tale for entrepreneurs, emphasizing the need to achieve the legal threshold for an operational business before deducting expenses. If you are unsure if you have met this threshold, contact one of our top Canadian tax lawyers for assistance.
FAQ:
When does a business 'commence' for the purpose of claiming deductions?
A business commences when its essential elements are in place, such as operational activities, contracts, or income-generating efforts (Gartry v. The Queen, 1994 CanLII 19352). Preliminary steps, such as planning, research, or pre-incorporation activities, do not qualify.
What happens if I claim expenses for a business that isn't operational?
If the Canada Revenue Agency (CRA) determines that the business has not commenced, as in Lienaux v. The King, the expenses will be disallowed. You may face a reassessment, and any tax benefits from the deduction will be reversed, resulting in a potentially costly tax bill. If you find yourself in this situation, it is best to contact an expert Canadian tax lawyer to discuss your case and determine how to defend your expense claims.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
