The Court’s Analysis: Should Costs of Funding Young Tennis Talent Be Allowed?

Last week Knowledge Bureau Report told you about Michel Bouchard (the “Appellant”) established a partnership known as the Tennis Mania Limited Partnership (“the Partnership”) in order to generate funding to support his daughter’s tennis development. At just 9 years of age, the Appellant was confident that his daughter was talented enough to make a career out of playing tennis. What did the Tax Court of Canada think of the arrangement?

The key determination that the TCC had to make was whether or not the Partnership was carrying on business with a view to profit and “whether it was carried out in accordance with objective standards of business-like behaviour” (paragraph 19). This test was established by the Supreme Court of Canada (“SCC”) in the case of Stewart v Canada [2002] 2 SCR 645, where the former reasonable expectation of profit test was replaced by this objective assessment of business-like behaviour. At paragraph 55 of that seminal case, the SCC stated that:

“The overall assessment to be made is whether or not the taxpayer is carrying on the activity in a commercial manner. However, this assessment should not be used to second-guess the business judgment of the taxpayer. It is the commercial nature of the taxpayer’s activity which must be evaluated, not his or her business acumen.”

The TCC held that the Appellant’s motivation was to benefit his daughter and to create a deductible tax loss. Although a taxpayer can arrange his or her affairs in a manner that minimizes taxes, and can enter an arrangement motivated largely by the creation of tax deductions, a secondary purpose must be the creation of profit. If such a second purpose is found, the losses are tax-deductible. A taxpayer may even enter a partnership with the primary motivation of securing a tax loss if there is an ancillary intention to carry on business in common with a view to profit.

Decision. It was held that the Appellant entered the Partnership strictly for personal reasons and that he was not looking to profit from the Partnership, but to fund his daughter’s tennis development and to create large tax deductions. Influential in the TCC’s decision was that the partnership agreement did not mention any sort of profit sharing scheme; the business losses claimed by the Appellant were personal to him and not claimed under paragraph 18(1)(h) of the Income Tax Act; no equipment or sponsorship money received by Eugénie was reported as revenue by the Partnership; the Partnership had no operating costs other than banking charges; no effort was made to sign up other athletes; and Eugénie was a minor (9 years old) when the Partnership was established and therefore unable to legally commit herself to share her future income—meaning the Partnership’s purported source of income was completely dependent on the good will of Eugénie.

Justice Masse had this to say in conclusion:

“I am not suggesting for one moment that Eugénie would be capricious or cavalier in her dealings with her father once she turned pro, but the reality is that she was not a party to the venture and she cannot legally be obliged to provide the profits that the partnership was supposedly looking for—her money is her money and no one else’s. Whether she chooses to share her money or not is her personal choice and the partnership is powerless to do anything about it. The partnership had no legal recourse against her if she refused to share her income stream with the partnership.” (Emphasis added)

As a result of the fact that profit from the venture was contingent on a non-legal relationship, it therefore could not be said that the Partnership was actively pursuing profit in a commercial manner and the losses incurred could not be deductible.

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.