The proposed statutory formulation of the REOP test is no more precise than common law tax requirements because it depends on all the facts and circumstances of a taxpayer's case.
In addition, in any year a loss is incurred, the REOP test requires a taxpayer to prove its expectation of profit many years after the initial investment by providing records for the entire holding period for the source.
The above tests are not exhaustive, and taxpayers must ensure that their businesses are truly commercial in substance, or be able to meet the REOP
and other tests that will be applied to their "personal element" endeavours.
The interaction of the REOP test with the source rule seemingly requires a microanalysis of business operations on at least an annual basis.
Cumulative Profit" Prong of the REOP Test is Unadministrable.
The extraordinary loss (and all subsequent losses incurred to remedy the situation) may be nondeductible under the REOP test and, thus, inconsistent with the current tax result.
The proposed REOP test ultimately depends on a source-by-source allocation of expenses, but the requirement to allocate expenses, such as general corporate overhead or research expenditures that benefit multiple business product lines, to each business and property source will engender new and significant disputes between taxpayers and the CRA because auditors may attempt to reallocate expenses in order to produce or increase nondeductible losses.
For the foregoing reasons, TEI urges the Standing Committee to recommend that the REOP test included in draft legislation affecting the deductibility of interest and other expenses be abandoned or substantially narrowed.
More important, it may encourage CRA auditors to reclassify expenditures and separate them from their income streams in an attempt to deny loss deductions under the REOP test.
Applying the REOP test to losses arising from long-term investments made prior to the effective date will likely impose a significant financial hardship on many taxpayers.
Where a loss is disallowed under the proposed REOP test of draft subsection 3.
In Stewart, the Supreme Court of Canada observed that the common law REOP test is a flexible, even amorphous, standard that courts apply based on all the facts and circumstances.