Can-Am CPA Professional Corporation Helps A Client Sell A Racehorse
At Can-Am CPA Professional Corporation, we are experienced accountants that come up with knowledgeable financial strategies in an open and friendly environment. We also like to take on unique tax issues, which forces us to learn and makes us more well-rounded accountants who can better serve clients. Please keep reading to learn about how we helped a client sell a racehorse.
The Challenge: The client was involved in a complex transaction
In the 2020 tax year, a new personal client approached us to have his tax return filed. He had a unique situation in that he was in the business of maintaining a racehorse, which included incurring expenses relating to the horse’s food and medical bills. He earned his income as a commission when the horse he raised won a race.
The challenge was determining whether the ITA would consider this activity self-employment or farming income. After several correspondences with the Canada Revenue Agency (CRA), the conclusion was to treat it as farming income.
In the 2021 tax year, the same client came back with an even more challenging and unique situation: He had sold a racehorse, this time at a loss (i.e., at a price lower than the original purchase amount). Now, the challenge was to decide whether this transaction would get treated as a business loss or a capital loss.
The Solution: Treat the item as a capital transaction
No matter which direction our instincts or common sense was leaning towards, proper research had to get done to ensure that tax laws were abided by and that we could secure the clients’ trust.
Accordingly, the first step in our approach to solving this tax issue was to look into various sections of the ITA that discussed farming income, business income, and capital gains/ losses. However, while the ITA sections provided examples, none of the discussions addressed anything similar to this unique situation.
As the tax filing deadline was approaching, we had to devise a solution quickly to ensure the deadline was met and that the taxpayer was not penalized by the CRA. Therefore, the next step was to request from the CRA cases of tax filings that were similar in nature, some of which dated back to the 1990s.
While we knew this action would not give a definitive answer, it was the best course of action to take as the situation was highly unique. The CRA agents could also not give us a straight answer on the spot.
Project Research Challenges
After the ITA research and phone calls to the CRA level one representative yielded no results, it was essential for us not to lose focus. So we had to keep looking elsewhere into different sources until a solution was discovered.
As a result of this thorough research process, the decision was to treat this item as a capital transaction. Simply put, this would mean that the horse would get treated as a non-depreciable capital asset. Therefore, the difference between the purchase price and the sale price of the horse would get reported as a capital loss, which could only get used to offset capital gains and not taxable income.
The Bottom Line
The work took about three weeks to complete, and the client was over the moon with the outcome. While a unique situation like this one may or may not get encountered in the future, we are happy that we took on the challenge.
Get in touch with us today!
Need assistance with a unique tax case? Get in touch as we are ready to help. As a leading full-service accounting and taxation firm in Weston, Toronto, we offer a wide range of financial services.
Our services include accounting, taxation, payroll, HST, WSIB, and bookkeeping. We also offer advisory, incorporation of personal tax returns, and corporate tax returns. We serve clients across Toronto, Pickering, Ajax, Mississauga, Brampton, Vaughan, and Woodridge.