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Nature of Trade

Published: September 16, 2020

Last Updated: June 11, 2021

Adventure or Concern in the Nature of Trade – A Canadian Tax Lawyer’s Guide

Introduction – What is included in Business Income?

The Federal Income Tax Act (“Tax Act”) outlines the sources of income that are taxable, including income from office, employment, business, and property. The authority for taxing business income is found in Section 9(1) of the Tax Act, which states that “a taxpayer’s income from business or property is the taxpayer’s profit from that business or property for the year.” Section 248(1) of the Tax Act defines “business” to include “a profession, calling, trade, manufacture or undertaking of any kind whatever and … an adventure or concern in the nature of trade.” Generally, a taxpayer who carries out a trade or profession consistently for the purpose of earning profit is considered to earn business income. However, where a taxpayer carries out a specific type of transaction infrequently or even a single time, the transaction may be considered an adventure or concern in the nature of trade, which results in that income also being characterized as business income.

The reason this distinction matters is because it may be preferable to a taxpayer to characterize this type of transaction as a capital transaction to attract the lower tax liability of capital gains, particularly where the taxpayer has capital losses for the year. The CRA would generally prefer to characterize income as business income as opposed to capital gains, because business income is fully taxable whereas capital transactions are only 50% taxable. If you believe the CRA has incorrectly characterized capital gains as business income, please contact our top Toronto tax law firm to discuss your situation.

Differentiating Between Business Income and Capital Gains

Canadian courts have identified some of the factors that should be considered when determining whether transactions are adventures or concerns in the nature of trade, or if they have a capital nature. In Friesen v Canada, [1995] 3 SCR 103, the Supreme Court of Canada stated the first requirement for an adventure or concern in the nature of trade is a “scheme for profit-making,” referring to the taxpayer’s legitimate intention to earn profit from the transaction. In the leading case Happy Valley Farms Ltd. V. Her Majesty The Queen, (1986) 7 F.T.R. 3, the Federal Court of Canada, Trial Division, laid out six factors used by courts to differentiate between business and capital income. In that case, the court held that a taxpayer who purchased 450 acres of farmland in 1969 and sold 400 acres in 1976 earned business income from the sales. The six factors outlined by the Federal Court are as follows: (1) nature of the asset; (2) length of ownership; (3) frequency or number of similar transactions; (4) work expended on the asset realized; (5) circumstances leading to the sale of the asset; and (6) motive in acquiring the asset.

The Exchequer Court in Minister of National Revenue v. Taylor, [1956] C.T.C. 189, identified two tests for determining whether a transaction is an adventure or concern in the nature of trade.

The first test assesses the taxpayer’s conduct before, during, and after the transaction, and is referred to as the “Same Kind, Same Way” test. A court must assess whether the transaction was the same kind and carried on in the same way as a transaction of an ordinary dealer in the same property. In particular, courts will assess if there were efforts made shortly after acquiring the property to attract buyers, or if the property was sold shortly after it was acquired. Another factor to consider is if the taxpayer takes steps to improve the marketability of the property and sells the property at the first available opportunity. These factors indicate that the taxpayer is acting as an ordinary dealer would and suggests that the transaction is an adventure or concern in the nature of trade.

The second test assesses the nature and the quantity of the property. Where the property is of a nature or magnitude that suggests it would not produce income or personal enjoyment to the taxpayer simply through ownership of the property, this suggests that it was only acquired for the purpose of a subsequent sale. At this stage, the test is subjective to the taxpayer, because even if the property could theoretically produce income or personal enjoyment for someone else, it must also be the case for the taxpayer in question. Certain types of properties, such as securities, are presumed to have an investment character, as they can produce income through operation or mere possession (Irrigation Industries Ltd. v. The Minister of National Revenue, [1962] SCR 346). However, the Tax Court of Canada held that a taxpayer incurred business losses, not capital losses, after a series of stock acquisitions were quickly resold at a loss (Hawa v. The Queen, 2006 TCC 612).

To illustrate this concept, John is a bank teller and purchases 10,000 cloth masks from a manufacturer in February, in anticipation of an increase in demand during the pandemic. He pays $5,000 for the masks. John immediately reaches out to retailers of various sizes to gauge their interest. A week after purchasing the masks, John reaches an agreement to sell all the masks for $30,000. The CRA would typically characterize these transactions, and the resulting $25,000 profit, as business income, whereas John would prefer to characterize the profit as capital gains. Based on the tests outlined above, the profit would likely be characterized as business income because the transactions were the same kind and carried on in the same way as they would by an ordinary dealer in such goods. Furthermore, the quantity of masks suggest that John could not have produced income or personal enjoyment solely through ownership of the masks.

Courts may also look to the taxpayer’s intention, particularly in the case of real estate, which taxpayers often purchase with multiple intentions. A taxpayer may purchase real estate with the primary intention of holding it as an investment, but with a secondary intention of selling it for a profit if they are unable to hold it as an investment. In Regal Heights Ltd. v. Minister of National Revenue, [1960] SCR 902, the Supreme Court established that if the circumstances show it would have been unlikely for the taxpayer to satisfy their primary intention due to a lack of resources or a lack of time, then the secondary intention to sell for a profit is sufficient to characterize the profit as business income. The Federal Court of Appeal further clarified this secondary intention concept in Canada Safeway Limited v. Canada, 2008 FCA 24, stating that the possibility of resale must have been an operating motivation for the purchase by the taxpayer.

Pro Tax Tips – Income Characterization

The characterization of income as business income or capital gains can have different impacts based on a taxpayer’s individual circumstances. Generally, it is preferable for taxpayers to characterize income as capital gains, because capital transactions are taxed at a lower rate. For help with structuring your transactions to achieve the most desirable tax characterization based on your circumstances, please contact our experienced Toronto tax law firm.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."


The best way to do this is to consult an experienced Canadian tax lawyer to help you with tax planning. A tax lawyer can analyze your situation to identify the beneficial and accurate classification of your income for your income tax filing.

The CRA will only accept one return per tax year. Once you’ve filed your return, you can’t file a new one. But you can correct the original by way of an adjustment. The CRA will charge a penalty if your business, either knowingly or under circumstances of gross negligence, makes a false statement or omission on a return. The penalty is the greater of either $100 or 50% of the amount of understated tax.

The CRA notes that when a non-profit organisation (NPO) disposes of a capital asset, the taxable capital gain will be included in the NPO’s income but will be exempt from tax. However, if the main purpose of an association is to provide dining, recreational or sporting facilities for its members, special rules will apply.

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