Almost every self-employed taxpayer and small landlord eventually runs into the same two provisions of the Income Tax Act. Section 18(1)(a) only permits a deduction for an outlay or expense to the extent it was made for the purpose of gaining or producing income from the business or property. Section 67 then adds a second filter: even an otherwise deductible expense is allowed only to the extent it was reasonable in the circumstances. Read together, these provisions are the Canada Revenue Agency's main tools for separating genuine business costs from personal spending dressed up as a deduction.
The decision in Peach v. Canada, 2022 FCA 163, is a useful illustration of how those tools work in practice. The Federal Court of Appeal dismissed the taxpayer's appeal and upheld the disallowance of business and rental losses, in a case where the line between commercial activity and personal or family arrangements had become badly blurred. The case is instructive precisely because it shows what happens when an activity generates persistent losses, the revenue is tiny relative to the claimed expenses, and the people on the other side of the transactions are the taxpayer's own family.
The facts
Mr. Peach lived in Newfoundland and carried on two activities he treated as sources of business or property income. He sold life insurance and mutual funds, dealing with a client base drawn largely from friends and family. He also owned rental properties that were rented to his three sons.
For the 2011 taxation year, the figures were striking. On the financial-services side, Mr. Peach reported only about $27 of revenue from the insurance activity, yet claimed in the order of $19,600 in business expenses against it, producing a large loss. The rental properties had likewise generated losses, and the activity had been carried on unprofitably over a long period rather than as a short start-up phase.
The Minister of National Revenue reassessed Mr. Peach for 2011. The reassessment removed the rental revenue and the associated rental losses from his income, reduced the business expenses he had claimed, and added a capital gain arising from the transfer of a rental property to one of his sons. Because the reassessment was issued after the ordinary reassessment period had expired, the Minister also had to satisfy the conditions for reassessing beyond the normal period, which is itself a recurring battleground in expense disputes.
Mr. Peach appealed to the Tax Court of Canada (the decision below, Peach v. The Queen, 2020 TCC 12). The Tax Court allowed the appeal in part, adjusting the capital gain to account for a capital expense the Minister had not recognized, but it dismissed the balance of Mr. Peach's arguments and otherwise upheld the disallowance of his losses. Mr. Peach then took the matter to the Federal Court of Appeal.
The issue
The appeal raised a question that sits at the heart of many small-business and rental files: when is an activity that loses money, year after year, still being carried on in a way that produces deductible expenses and losses, and when are the claimed amounts either not incurred to earn income at all, or simply unreasonable in the circumstances?
Two analytical steps were in play:
- Purpose under s.18(1)(a). Were the outlays actually made for the purpose of gaining or producing income from a business or property, or did they reflect personal and family arrangements rather than a genuine income-earning purpose?
- Reasonableness under s.67. To the extent expenses cleared the purpose test, were they reasonable in the circumstances, given the scale of the activity and the revenue it could realistically generate?
Layered on top was a familiar principle that taxpayers often invoke: the idea that courts and the CRA should not sit in the shoes of the business owner and second-guess ordinary commercial decisions. Mr. Peach's appeal tested how far that principle stretches when an activity has strong personal and family characteristics.
What the Court decided (and why)
The Federal Court of Appeal dismissed Mr. Peach's appeal. In doing so, it accepted the general principle that the Tax Court's role is not to evaluate a taxpayer's business acumen, but it explained why that principle did not rescue these particular deductions.
The starting point for the reasonableness analysis is long established. In Gabco Ltd. v. Minister of National Revenue, the Exchequer Court framed the s.67 question not as whether a judge or the Minister would have spent the money, but whether no reasonable business person would have incurred the expense, having only the business consideration of the taxpayer in mind. That formulation deliberately leaves room for commercial judgment: an expense is not unreasonable merely because, with hindsight, it did not pay off. The Federal Court of Appeal also had to reconcile its analysis with Keeping v. Canada, an earlier decision in which a taxpayer's expenses were respected even though the venture lost money, on the basis that the activity there had a genuine commercial character and no significant personal element.
What distinguished Mr. Peach's situation was the pervasive personal and family character of the activities. The insurance activity produced almost no revenue while generating thousands of dollars in claimed expenses, a mismatch that is difficult to square with an activity carried on to earn income. The rental properties were rented to the taxpayer's own sons, and one was transferred to a son, arrangements that carry an obvious non-commercial dimension. On that record, the Court was satisfied that the claimed amounts could not be supported as reasonable business or property expenses incurred to earn income. The principle against second-guessing commercial decisions did not apply with the same force, because what was before the Court was not a hard-nosed commercial decision that happened to fail, but spending shot through with personal and family considerations.
The capital-gain issue reinforced the point. Transferring property to a family member is a disposition with tax consequences, and the gain could not be avoided simply because the parties were related; the Tax Court's only adjustment was to recognize a capital expense in computing that gain.
Why this decision matters / practical takeaways
Peach is a helpful reminder that the two provisions work in tandem, and that the popular shorthand — "the CRA can't tell me how to run my business" — is only half the picture. Courts do give real weight to commercial judgment under the Gabco standard, but that deference is strongest where the activity is genuinely commercial and weakest where personal or family elements dominate. Some practical points emerge:
- Purpose comes first. Before reasonableness is even reached, the expense must have been incurred to earn income. Spending that mainly serves a personal or family objective can fail at the s.18(1)(a) stage regardless of how it is characterized.
- Scale matters under s.67. An expense base of roughly $19,600 set against $27 of revenue invites scrutiny. The greater the gap between the cost claimed and the income the activity can plausibly produce, the harder it is to show the amount was reasonable in the circumstances.
- Family transactions attract attention. Renting to or transferring property to one's own children is not prohibited, but it removes the arm's-length discipline that ordinarily signals a commercial arrangement, and it can trigger consequences such as deemed proceeds at fair market value on a transfer.
- Persistent losses are a signal, not a verdict. Losses alone do not make expenses non-deductible. But a long history of losses, combined with personal elements, gives the CRA and the courts reason to look closely at whether the activity is being carried on to earn income and whether the expenses are reasonable.
- Documentation is the difference. Contemporaneous records that tie each expense to the income-earning activity — logs, invoices, client lists, lease terms at market rates — are what separate a defensible deduction from a disallowed one.
If your business or rental losses have been reassessed, or you have received a proposal letter questioning your expenses, the analysis usually turns on evidence: what the expense was for, and whether its amount was reasonable given the activity. You can read more about how these disputes run in our guides to the Tax Court of Canada appeal process and to evidence and the burden of proof in the Tax Court.
How Barrett Tax Law approaches business-expense files
Expense-deductibility files reward early, methodical preparation. When we take on a matter involving disallowed business or rental losses, we start by separating the two questions the law actually asks: was each outlay incurred for the purpose of earning income under section 18(1)(a), and was the amount reasonable in the circumstances under section 67? From there, we assemble the supporting record — invoices, ledgers, mileage and use logs, lease agreements and correspondence — that connects the spending to the income-earning activity, and we test the CRA's assumptions, including any reliance on a reassessment issued beyond the normal period.
Depending on the facts, the path forward may run through representations during an audit, a Notice of Objection, or an appeal to the Tax Court of Canada. Our work in this area connects to related files we handle, including audit representation, net worth audits, and gross-negligence penalties, which the CRA sometimes adds when it disallows expenses. If your expenses or losses have been challenged, you are welcome to reach out for a free, confidential consultation so we can review the reassessment and your options.
You can read the decision on CanLII: Peach v. Canada, 2022 FCA 163.
This article is commentary on a public court decision. It is general information only, not legal advice, and outcomes depend on the specific facts of each case.
Frequently asked questions
What do sections 18(1)(a) and 67 of the Income Tax Act actually require?
Section 18(1)(a) permits a deduction only to the extent the outlay or expense was made for the purpose of gaining or producing income from a business or property. Section 67 adds a separate limit: even an otherwise deductible expense is allowed only to the extent it was reasonable in the circumstances. An expense must satisfy both tests, so it can be disallowed either because it was not incurred to earn income or because the amount was unreasonable.
What was decided in Peach v. Canada, 2022 FCA 163?
The Federal Court of Appeal dismissed Mr. Peach's appeal and upheld the disallowance of his claimed business and rental losses for 2011. His insurance activity generated only about $27 of revenue while he claimed roughly $19,600 in expenses, and his rental properties were rented to and partly transferred to his own sons. Because the activities were heavily personal and family-oriented, the Court found the claimed amounts could not be supported as reasonable expenses incurred to earn income.
Does Peach mean the CRA can second-guess how I run my business?
Not exactly. Courts continue to apply the standard from Gabco, which asks whether no reasonable business person would have incurred the expense, leaving room for genuine commercial judgment even when a venture loses money. What Peach shows is that this deference is weakest when an activity is shot through with personal or family elements. Where the spending mainly serves a personal objective, the principle against second-guessing commercial decisions carries much less weight.
Are business losses automatically non-deductible?
No. Incurring a loss does not by itself make expenses non-deductible, and many legitimate businesses lose money, especially in early years. However, a long history of losses, combined with revenue that is tiny relative to claimed expenses and the presence of personal or family arrangements, gives the CRA and the courts reason to examine closely whether the activity is genuinely being carried on to earn income and whether each expense is reasonable in the circumstances.
Why do transactions with family members attract extra scrutiny?
Dealings with one's own children or other related persons are not arm's-length, so they lack the market discipline that normally signals a commercial arrangement. Renting to family below market terms can undercut the claim that a rental is a genuine income-earning property, and transferring property to a family member can trigger tax consequences, such as a disposition at fair market value, regardless of what the parties actually exchanged. In Peach, the rental of properties to the taxpayer's sons and a transfer to a son were central to the outcome.
What should I do if the CRA disallows my business or rental expenses?
Start by gathering contemporaneous documentation that ties each expense to your income-earning activity, such as invoices, ledgers, mileage and use logs, and lease agreements. The analysis usually turns on two questions: was the expense incurred to earn income, and was the amount reasonable. From there the options typically include making representations during the audit, filing a Notice of Objection, or appealing to the Tax Court of Canada. Acting early, while records and recollections are still fresh, generally strengthens the position.