The CRA was asked about the deductibility of certain expenses incurred for a trip to a resort to entertain employees and suppliers for business and recreational purposes.
A deduction for an outlay or expense is denied under the "General Limitation" rule in paragraph 18(1)(a) of the Act, except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.
The use of recreational facilities and club dues are also discussed in subparagraph 18(1)(l)(i) of the Act, which denies a deduction for outlays or expenses made or incurred by a taxpayer for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility.
Section 67.1 of the Act restricts the deduction for most meals and entertainment expenses, that are otherwise deductible under paragraph 18(1)(a) of the Act, to 50% of the lesser of the actual expenditures and a reasonable amount.
No amount paid or payable for travel on an airplane, train or bus is to be considered to be in respect of food, beverages, or entertainment, under subsection 67.1(4) of the Act.
Resort is a lodge
The CRA noted that it is a question of fact whether the resort is a "lodge" within the meaning of subparagraph 18(1)(l)(i) of the Act. The CRA explained that expenses for hotels, flights, food, beverages and entertainment that are not subject to paragraph 18(1)(l) of the Act are still subject to the provisions of paragraph 18(1)(a) and section 67.1 of the Act.
The CRA noted that, in the Hewlett-Packard case, the Tax Court of Canada (TCC) addressed the meaning of lodge for the purposes of subparagraph 18(1)(l)(i) of the Act. The TCC found that a lodge does not include large, full-service hotels.
The CRA advised that, even if the resort meets the definition of a lodge within the meaning of subparagraph 18(1)(l)(i) of the Act and if the company uses the resort primarily for business purposes, then the cost of the resort accommodations and the related expenditures would be deductible, subject to the 50% limitation in section 67.1 of the Act. However, if the resort is used mainly by the company for recreation or entertainment, no portion of the costs would be deductible. In particular, no deduction would be available even if some business meetings are held.
Although a deduction for the use of a lodge is prohibited under paragraph 18(1)(l), the CRA's administrative position is that where the main use of a lodge is for genuine business purposes, a deduction may still be allowed. See IT-148R3, "Recreational Properties and Club Dues".
Resort is not a lodge
The CRA said that, based on Hewlett-Packard, its position is that the resort at issue in this TI would not likely be a lodge within the meaning of subparagraph 18(1)(l)(i) of the Act. Even though the resort is not a lodge, a deduction for the resort expenses incurred may still be denied by paragraph 18(1)(a) of the Act.
Where only a portion of the expenditures were incurred for the purpose of gaining or producing income from a business, a reasonable percentage of the resort expenditures would be deductible in computing business income. In addition, the business portion of reasonable amounts expended for the airplane tickets and taxis would also be deductible. The CRA said that taxpayers are responsible for determining the percentage of business use and must be prepared to justify their position.
Employee taxable benefits
The CRA said that, where the trip is a taxable benefit to be included in the employee's income under paragraph 6(1)(a) of the Act, the company could deduct the corresponding amount for tax purposes. Paragraph 67.1(2)(d) of the Act provides that an employer is not subject to the 50% limitation on allowances or reimbursements for meal or entertainment expenses that are included in an employee's income.
Expenses incurred for green fees and golf equipment rental are not deductible under subparagraph 18(1)(l)(i) of the Act. Where there is a genuine business purpose, reasonable amounts expended for meals and beverages consumed at a golf club are deductible, subject to the 50% limitation in section 67.1 of the Act. The CRA requires that taxpayers clearly itemize meal and beverage expenses incurred at a golf club.
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