Tax Forum
Entertaining Expenses
Should the 50 per cent deduction for entertainment expenses apply to transportation to and from the event?
FROM:
MAR-APR 2003 ISSUE | BY
DON GOODISON
A client of mine owns Vancouver Canucks season tickets, but he never attends games himself. Instead, he always gives them away to customers as gifts. Now, as you all know,
subsection 67.1(1) of the
Income Tax Act restricts the deduction of expenditures for food, beverages and entertainment to
50 per cent of their cost, the reasoning being that activities such as lunches and sporting events are considered to entail a personal element. But why should my client have to deduct only
50 per cent of the cost of his tickets when he doesn't use them personally? There are, of course, a number of exceptions to the general rule, and this is where the confusion comes in.
Since paragraph 18 of interpretation
bulletin IT-518R,
Food, Berverages and Entertainment Expenses, lists the cost of tickets to athletic events as entertainment subject to the
50 per cent limitation, there doesn't seem to be an exception for my client's situation. However, the exact wording of
subsection 67.1(1) says "the
enjoyment of entertainment" [emphasis added]. The exact meaning of "enjoyment" is the question that the court was asked to answer in
T. EvansElectric Ltd. (Evans) (appellant) vs.
Her Majesty the Queen (respondent)
[Tax Court of Canada;
2002-659(GST)I;2002-660(IT)I].
In 1990, the electrical contractor T. Evans Electric Ltd. was bidding on contracts in northern areas that were accessible only by aircraft. To be able to carry out the work in these remote areas, the company purchased a
Cessna 180B airplane. Evans did not get the contracts, but kept the plane anyway. One of the company's shareholders was a pilot, and the company used the plane to fly customers on
one-day fishing trips to remote northern lakes. These trips were ideal opportunities to discuss business. The shareholder also used the plane for personal trips with his family.
The company expensed all the costs associated with the plane, but charged the shareholder with a personal use portion at the fiscal year end. The company claimed the balance as related to the fishing trips.
In 1997, 1998 and 1999, it claimed operating expenses of $3,523, $15,775 and $4,126 respectively, as well as capital cost allowances of $2,018 in 1997, $1,513 in 1998, and $1,135 in 1999. The tax department disallowed
50 per cent of the expenses on the grounds that the costs were part of entertaining customers. The company appealed to the Tax Court of Canada.
Enjoying Trip?
Evans argued that the cost of the flight to the lake was not part of the recreation, nor could it be considered enjoyable. The Crown responded that, in its view, the recreation started when the customers got on the plane, not when they got off at the lake. The Crown referred to the words clarifying the "enjoyment of entertainment" in
paragraph 18 of
IT-518R: "This refers to the mere attendance at or experience of the event or service." It argued that the costs of transportation to and from the event were implicit in this wording.
In allowing the appeal, the court held that the transportation costs to and from an event did not constitute part of the entertainment. The judge found that, contrary to the Crown counsel's argument, transportation costs were specifically excluded in the wording of
IT-518R. The judge used a cruise as an example, pointing out that the interpretation bulletin refers to the cost of the cruise, but not the costs of getting to the ship. In the Evans case, the judge stated:
The recreational event at issue before me is the activity of fishing. Flying in a noisy little Cessna to get to the fishing may be enjoyable to some, but likely not to most. Even in relying on a wide meaning of the term "in respect of" as it relates to the enjoyment of the fishing activity, I do not find that it encompasses operating costs of an aircraft to get to the fishing. The fishing starts when you get to the lake. . . The entertainment or recreation event is not the flight; it is the fishing.
The decision was essentially an assessment of where the enjoyment began. Clearly the judge did not think that the flight on a noisy little
Cessna 180B was the enjoyable part of the activity. Would the decision have been different had Evans used a luxury helicopter with food and beverages on board? Based on the court's statement that the entertainment does not include getting to and from the activity, the answer would be no.
During the course of the proceedings, Evans had suggested that to find that the cost of the trip was part of the recreation would require a
50 per cent restriction on automobile costs when taking a client to lunch. If this is not the case with a car, why would it be any different with an aircraft? I just hope that the analogy did not give the government any ideas about changing the legislation to make transportation a part of the recreation. Imagine the administrative nightmare in trying to determine what was entertainment and what wasn't. The thought boggles the mind.
Business or Pleasure?
The restrictions placed on the deduction of entertainment and food expenses support the view that it is somehow repugnant for Canadian taxpayers to subsidize somebody else's entertainment. This could be based on some misguided notion that no part of work should be fun, or an errant assumption that business people are automatically corrupt. I disagree.
I also have strong feelings about
paragraph 18(1)(l), which completely disallows the costs of using a yacht, lodge or golf course. I have clients who regularly use their yachts to entertain customers and employees. One of my past clients used his yacht to travel to communities along the
B.C. coast, many of which were accessible only by boat or air. He stayed on board during the course of his business as a sales representative. Yet,
paragraph 18(1)(l) would specifically disallow the costs of his boat. This, coupled with the fact that aircraft or vehicle costs would be deductible, is absurd. There are those who abuse the deductions, but that happens with any deductible expense.
The CCRA is very good at weeding out abuses, and there is no doubt that it would be quite capable of doing the same with yacht, lodge and golf expenses.
Game Over
Returning to my client with the Canucks tickets, the wording of
IT-518R indicates he may actually have a case since he doesn't attend the games himself. As indicated earlier, the interpretation bulletin states that enjoyment of entertainment entails "the mere attendance at or experience of the event." But should I advise him to take on the CCRA in court? After all, the tax department will no doubt call him on deducting the full cost of his tickets. But, then again, given the team's sorry record in many seasons, perhaps he could argue that the enjoyment of the event began when the final whistle blew.
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Don Goodison, CFP, FCGA, is a partner of Kemp Harvey Goodison, Certified General Accountants, in Burnaby, B.C. E-mail
goodison@axionet.com.