November 2023 Tax Alert: Federal Court of Appeal Confirms the CRA Not Limited To Three Years To Assess Family Real Estate Activities

In recent years, the CRA has increasingly paid attention to business income reported and expenses claimed further to dealings with family and friends. At times, the CRA takes the position that the business has not dealt with the family member or friend as though they were arm’s length. As a result, there may be shareholder benefits assessed, expenses denied, etc. In some instances though, the CRA may take the position that there is actually no business – that the taxpayer is simply an individual providing things to family and friends.

In the recent Federal Court of Appeal decision of Peach v. Canada, the taxpayer owned three real estate properties and claimed significant capital losses on his income tax returns. The taxpayer had rented his properties to his sons at a rate far below market rate and later characterized the anticipated rental losses as capital losses. The taxpayer also reported substantial expenses associated with his consulting business, which had a client base constating primarily of his family and friends. These consulting business expenses were almost $20,000, which he incurred further to the reported revenue of only $27. The Federal Court of Appeal upheld the decision of the Tax Court of Canada. As the rental activities were not further to the pursuit of profit, all rental income and expenses should be removed from the taxpayer’s income. Further, as the consulting business was not operated as a reasonable “commercially-minded business person would behave”, the expenses should be disallowed.

In rendering this decision, the Federal Court of Appeal also addressed the timing of the CRA’s reassessment. In particular, the CRA had reassessed the taxpayer a few months beyond the normal three-year reassessment period established by para. 152(3.1)(b) of the Income Tax Act. To go beyond the three-year period, the CRA must establish that the taxpayer made neglectful, careless, or wilful misrepresentations. The Tax Court of Canada held and the Federal Court of Appeal agreed, the taxpayer did not act as a wise and prudent person, but instead the very opposite. Accordingly, the Minister was permitted to go beyond the three-year period.

In review of the above, it is important for taxpayers to tread carefully when engaging in business dealings with family and friends. The goal of the dealings should remain to pursue profit. The terms of the business agreement should be reflective of market terms. And the expenses incurred should be reflective of what a commercially-minded business person would incur. The Peach decision also serves as a helpful reminder that the CRA is not always limited to three years to reassess. Any taxpayer failing to exercise reasonable care risks the potential of a reassessment beyond the three-year window.

For more information or for assisting with addressing a reassessment related to family dealings, please speak with one of our tax lawyers or tax litigators.