5.4 What are the relevant sections of the ITA that deal with business income? Where does business income go in the S3 ordering rules?

ITA 9(1) – “Subject to this Part, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year.”

248(1) “business” — “For purposes of the Act, a business is defined to include a profession, calling, trade, manufacture, or undertaking of any kind whatever, as well as an adventure or concern in the nature of trade. It does not include an office or employment.”

In accordance with the ordering rules, business income is recorded under Division B S3(a) if revenues are higher than expenses. If a business has a net loss for the year (i.e. revenue is less than expenses) then the net loss will be allocated under S3(d) and recorded as a loss.

When calculating the Net Income for Tax Purposes, business income goes under S3(a) if there is a profit. For example, if you have a restaurant that has revenue of $1,000,000 and expenses of $300,000, then the total income is recorded as a profit of $700,000 under S3(a).  However, if the restaurant had expenses greater than revenues then the net loss for that restaurant would be recorded in S3(d)

Let’s say that in addition to your restaurant, you also have an electronics store that has revenue of $500,000 and has expenses of $1,400,000. This would cause the electronic store to have a total loss of $900,000. The income from the restaurant would still be recorded under S3(a) and the business loss of the electronic store would be recorded under S3(d). These two business incomes would not be combined and are intended to be assessed separately.

In this case, there is a total loss of $200,000, but the Net Income for Tax Purposes will be recorded as $0. The $200,000 loss is added to your non-capital loss balance and can be applied against income for other years.

References and Resources

• Income Tax Act, RSC 1985, c1, (5th Supp.) ss 9(1), 39(1), 248(1)
• Chartered Professional Accountants. (2022). The Chartered Professional Accountant Competency Map. Part 1: The CPA Competency Map: 6.1.1, 6.3.2