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Income tax — claiming business losses from past years

I was helping a client on a tax dispute. I discovered through discussions with him that he had been engaged in two different business ventures three years earlier.

The first business was a legitimate attempt to develop a product, where he spent $50,000 on the development costs but the project didn't go anywhere. His accountant, an overly conservative C.A., had told him not to claim the losses.

The second "business" was very active stock trading, typically holding stocks for 0-20 days before selling them, that resulted in over $100,000 in losses. His C.A. had simply recorded them as capital losses (which were not usable as deductions against other income). Meanwhile he had substantial employment income each year and paid hundreds of thousands of dollars in tax.

I came across this situation quite by accident, while helping the client on an appeal of a different tax year. It seemed evident to me that both activities were "businesses" as interpreted by Revenue Canada, and the losses (real cash losses) should be allowed against his other income.

I put the documentation together, with detailed spreadsheets showing all the expenses and all the stock activity, and sent it to Revenue Canada with a T1- Adjustment request for the two years in question and a comprehensive submission explaining all the facts.

It took over a year, but in the end Revenue Canada allowed all the losses without auditing the financial records, and my client received a refund of more than $100,000.

Money from nowhere!

(1998)