
Published: July 25, 2025
The tax treatment of income in Canada depends on its classification, making it essential for taxpayers to understand the nature of the income they earn in order to file tax returns accurately and engage in effective tax planning. However, the distinction between different types of income—particularly between business income and capital gains —is not always straightforward and often requires careful legal interpretation. This is especially true in complex cases, where the guidance of an experienced Canadian tax lawyer can be crucial.
The leading authority on distinguishing between business and capital income is the case of Happy Valley Farms Ltd. v. Her Majesty the Queen. In that decision, the court established a six-factor test to determine the appropriate classification. No single factor is conclusive; rather, all must be assessed in the context of the taxpayer’s overall conduct and circumstances. The six factors are:
- Nature of the Property Sold: Some types of property are more commonly associated with one type of income. For instance, shares are typically linked with capital gains, although they can generate business income in certain contexts. Real estate may be neutral. Generally, if the property yields financial returns or personal enjoyment simply through ownership, its sale is more likely to produce capital income.
- Length of Ownership: A short holding period may suggest business income, especially if the property was acquired with a view to resale. However, courts consider whether the short duration was reasonable under the circumstances.
- Frequency of Similar Transactions: Repeated or multiple similar sales—especially within a short timeframe—typically indicate a business activity.
- Work Performed on the Property: Efforts to improve, market, or sell the property point toward business income. This factor is often evaluated by comparing the taxpayer’s actions to those of a businessperson handling similar property.
- Circumstances of the Sale: If the sale results from unexpected events, such as a job loss or financial hardship, and was not anticipated at the time of purchase, the income may be considered capital in nature.
- Motive at the Time of Acquisition: The taxpayer’s original intention—whether to earn business income or realize a capital gain—is a critical consideration.
These factors are designed to reveal the taxpayer’s intent regarding the property at the time of acquisition, based on their behaviour and surrounding circumstances. If the taxpayer’s actions align with a business purpose, the resulting income will generally be classified as business income.
A secondary intention is sufficient to lead to business income
In Happy Valley Farms, the Court recognized the concept of “secondary intention.” This arises when, at the time of acquiring the property, the taxpayer’s primary purpose was investment, but there was also a concurrent, secondary motivation to resell the property for a profit if the opportunity arose. When such a secondary intention is established, the resulting gain from the sale may be treated as business income for tax purposes.
In the leading case of Regal Heights v M.N.R. (1960) regarding the secondary intention doctrine, the tax court judge found that there was a good chance that the taxpayer’s initial plan to develop land into a shopping centre might not come off and that the taxpayer was aware of this and had a secondary intention to sell the land at a profit if the primary intention became impracticable.
The Supreme Court of Canada accepted these findings and held that the existence of such secondary intention made the enterprise “an adventure in the nature of trade,” a phrase with specific meaning in Canadian tax law. It is also referred to as “concern in the nature of trade.” Both phrases are trying to ascertain the heart of the taxpayer’s intent: “What is the taxpayer trying to accomplish and why?”
The Tax Court of Canada clarified the standard regarding the secondary intention test in Mirza v. The Queen, [1998] 4 CTC 2272, where a taxpayer bought and sold three properties and the CRA reassessed his gains from the sale as business income.
The Tax Court clarified that it is not sufficient to establish a secondary intention merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it, for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after the purchase, he would resell.
Thus, it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a ‘secondary intention’ if one wants to utilize this term.
Instead, to give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital.
Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.
Pro tax tips – A secondary intention depends on the facts of each case
The classification of income as either business income or a capital gain can significantly affect a taxpayer’s overall tax liability, depending on their specific circumstances.
In most cases, it is more advantageous to treat income as a capital gain, given that capital gains are subject to a lower rate of tax. To ensure your transactions are structured for optimal tax treatment, consult with an experienced Canadian tax lawyer before acquiring a significant investment asset.
FAQ:
What is the difference in tax treatment of business income vs capital gains?
The difference in tax treatment regarding these two is significant, as business income (or loss) gets included in income at 100%, whereas a capital gain (or loss) is only included in income at 50%.
How is a secondary intention established regarding an adventure in the nature of trade?
A secondary intention is established if a taxpayer’s intention when acquiring the property is partially motivated by the possibility of reselling. The possibility of resale due to a sufficiently high price is not enough to establish a secondary intention.
Disclaimer:
This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
Disclaimer:
"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."