Critical thinking question

If an individual with an employment income of $50,000$ p$.$a$.$ buys camera equipment to

start, say, a YouTube channel for $$20,000,$ but subsequently, the venture is a failure,

will this amount used to acquire the equipment, $$20,000,$ be a noncapital loss as a

sole proprietor?

When an individual embarks on a venture, like starting a YouTube channel, the question of

whether expenses related to the venture can be deducted hinges on the principle of a

"reasonable expectation of profit" $($REOP$)$ and whether the venture is indeed $-$ or can be$-$a

source of business income.

If the individual genuinely entered the venture with a reasonable expectation of profit and

carried out the activities in a business$-$like manner, then it is treated as a business activity. If the

venture incurs expenses exceeding the income it generates, it results in a business loss.

In this example:

The individual has an employment income of $$50,000.$

They spend $$20,000$ on camera equipment for their YouTube channel.

The venture doesn't generate any income and fails.

If the CRA accepts that the YouTube channel was a legitimate business activity with a REOP

$($which they should, as per case primacy$),$ the $$20,000$ would be a business loss. This business

loss would offset other sources of income in the year.

So$,$ the individual's total income for tax purposes for the year would be:

$$50,000($employment income$)-$ $$20,000($business loss$)=$$$30,000$$$=$ Taxable income.

This results in a reduction of taxable income, potentially leading to a lower tax liability.

If the CRA challenges the legitimacy of the business activity and believes it was a personal or

hobby activity, then the loss might not be deductible. Maintaining proper documentation,

records, and evidence that you pursued the venture with a business intent and a reasonable

expectation of profit is essential.

In this case, the $$20,000$ spent on camera equipment would indeed be considered a non$-$capital

loss as a sole proprietor $-$ if it's accepted as a legitimate business activity. If the individual has

no other income sources to offset in the current year, they can carry this non$-$capital loss back

three years or forward up to twenty years to offset other income.