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RECENT TAX COURT CASES ON ISC BUSINESS EXPENSES

THE FIRST HURDLE: PROVING YOU ARE CARRYING ON A BUSINESS!

The Canada Revenue Agency (the “CRA”) continues to scrutinize business expenses claimed by taxpayers, particularly where business losses are involved.  These audits can impact Independent Sales Contractors (“ISCs”) of direct selling companies. 

While ISCs are responsible for claiming their own business expenses, the CRA may go further than auditing expenses and can also question whether the ISC is really “carrying on business” at all.  Two recent Tax Court of Canada (“TCC”) decisions in the direct selling space demonstrate the tests the TCC applies.

Nickerson v. The King

In Nickerson (2025 TCC 3), the taxpayer and his wife participated a multi-level marketing (“MLM”) plan, reporting gross business income over $430,000 and business expenses of over $350,000 between 2014 and 2015.  CRA disallowed over $125,000 in business expenses, primarily in respect of meetings, seminars, conventions, and promotional events. 

The TCC considered the taxpayer’s expenses but ultimately found the taxpayer failed to establish a proper business purpose for many expenses and did not provide sufficient proof of payment for others. 

Ultimately, the TCC allowed about half of his share of the disallowed business expenses.

Sennaike v. The King

In Sennaike (2025 TCC 122), the taxpayer purchased products from an MLM company (not the same one as above) for resale to customers.  He also actively attended leadership development programs offered by his MLM, mentoring others on how to run their own MLM businesses.  The taxpayer reported business losses of between $3,000 and $13,000 a year in 2019 and 2020 from his MLM activities on gross revenue of between $3,000 and $6,000.  The CRA took the position the taxpayer’s MLM activities were not a source of income. 

The TCC began with a consideration of the facts to determine whether the taxpayer’s activities constituted a source of income.  The Court considered a range of factors, including the taxpayer’s subjective intention to earn profit, objective evidence supporting that intention, past profit and loss experience, training, intended and actual course of action, and the capability of the venture to generate profit.

The TCC ultimately found that the taxpayer’s MLM activities did not constitute a source of income, pointing to the predominance of the taxpayer’s personal development activities over sales (the taxpayer testified they saw the MLM as a way to develop as an entrepreneur and businessman), absence of proper sales records, omission of cost of goods sold in financial statements, lack of evidence of commissions earned, and absence of a credible plan to generate profit.  

The TCC upheld the CRA’s reassessment, calling their description of the taxpayer’s activities as “a hobby with a business flair” an “apt description”. 

Takeaways

These two cases illustrate the level of scrutiny with which the CRA and the TCC consider business expenses. ISCs should ensure that they carry on their MLM activities in a business-like manner if they wish to actually claim business expenses.

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