One of my client was hospitalized in 2024 off work for most of the year, so he had very little income. Its going to be a huge loss if all expenses are recorded and claimed, but since he only operated for 2 months, I am thinking he should only claim 2 out the 12 on all expenses, as there would be no expectation of profit for the other 10 months. Am I thinking it right or would it be an exceptional case that he can claim expenses for the full year. And if I am claiming only 2 months of expenses, what about GST.
What is wrong with a big loss?
What if he was sick and had a profit? Would you only claim 2 months?
There is nothing wrong with big losses, but since he is not operating his business for the time he was in the hospital, there is no expectation of profit for those months, so expenses might be disallowed
Some expenses, such as his phone, office expenses, must continue year-round, but he shouldn’t have any supplies for most of the year.
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Lots of businesses take breaks, too, during which there is no reasonable expectation of profit…that does NOT mean that there is no REOP for the year, or extending that, for future years.
Claim it all, as long as it is reasonable and you would usually claim the expense.
The Reasonable Expectation of Profit (REOP) test was overriden for income tax purposes many years ago. The determining factor according to current case law is whether the expense was incurred in a personal activity or a bone fide commercial activity. The determining factors are things like how the taxpayer carries on the business - do they maintain formal business records, do they present themselves as a business, etc. CRA still tries to apply a REOP test to income income tax returns, even though the case it was based on (Moldowan) was effectively overturned by a more recent one (Stewart).
Note that this does not apply to GST/HST, since the Excise Tax Act makes explicit reference to a REOP test so it still applies there.
In this case, it seems unlikely that an activity would change from commercial to personal based solely on the taxpayer’s health. So the expenses should still be deductible. CRA might challenge it, of course, and then all you have to do is explain why they’re wrong. 
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@iain.fyffe
Thank you for this information.
A background of case law source from Tax Interpretations follows at this link.
A reversal explanation from Jamie Golombek follows here:
An update point of view from Thompson Reuters follows here:
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From what I see, there are lots of business making losses. The streets look like they are business, but they sure are hurting. Owners are putting more equity into business to keep businesses running.
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Yep…it takes CRA a long time to adjust. It shouldn’t…but it seems to.
And FWIW, the consideration of “whether the venture is a bona fide commercial activity or personal in nature” was largely to prevent evaluation of whether (in the REOP test) a business had a commercial viability in the eyes of CRA - who are NOT and decidedly not - business people.
Furthermore, the decision in Stewart was one primarily to separate issues of “hobby vs actual business” (for lack of better terms) vs “evaluation of business judgment” of a taxpayer.
In this case there is NO hobby element and there is no reason to question the owner’s decision to continue operating during a period of ill health.
(See also Peach 2022 FCA 163)
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There is reason REOP was there, the term might be changed, CRA might tweaked the term, based on ruling or something, but similar rules still in place. I have seen many business claim what I think excessive expenses, with net income few thousands, I can’t help but shaking my head. You can make more with minimum wage job, some said they like the freedom, but we know the real reason behind. And that’s hurting people that have genuine reason, like this one due to illness.
I had a client, once, had accumulated losses over a quarter millions in couple of years, asked how to make good use of the losses. I asked him couple questions, if you experienced loss the first year, fine, second year, more losses, okay, 3rd year, again, and you keep on adding up the losses. Was there plan to reduce overhead, inventory, no, then what’s the reason behind to keep on putting money to keep a business that’s losing lots of money? and no plan to reduce the expenses? At the end, no answer
Sometimes businesses are there to provide income to the workers.
I did some management consulting work earlier in my career and ran into a few companies which did lose money. There does exist a large number of companies that are not there to make money but in the business of government loans and grants. The owner was pulling in $150k in the 90s and the company did make use of the grants (for an environmental product). The issue with many of these companies was the lack of a market in Canada and they were into collecting grants.
Another grant story was a consultant firm I worked for. My boss applied for some grant in northern Ontario. We had to pretend we worked in a rented office to meet the city officials. He did get the grant.
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There really are people who would rather live in minimum wage self-employment (or close to it) than have to work for someone else. And there are other reasons for that, too, such as being disabled or having health issues. I see it all the time.
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It’s fine what people decides to do, but that’s where I learned not to judge, based on facts, that’s where I usually tell clients, it’s fine how much business you want to do, but when you have $10K in income, but deduct $9k in expenses for the full year, that’s where problems come in, especially you know they are the snowbirds. And I will simply refuse them