Hotels and Lodges 

Tax Forum

Hotels and Lodges

What are the challenges of claiming business expenses under paragraph 18(1)(l)?

FROM: MAR-APR 2006 ISSUE | BY DON GOODISON

Can a hotel with more than 200 rooms be considered a lodge? A strange question, perhaps, but one that was put before the Tax Court of Canada in Hewlett-Packard (Canada) Co., (formerly Compaq Canada Corp., successor corporation to Digital Equipment of Canada Limited) v. the Queen [2005 TCC 398].

The facts of the case are fairly straightforward. Until 1998, Hewlett-Packard's predecessor, Digital Equipment of Canada Limited, had a program called the Employee Rewards and Recognition Compensation Program. As part of the program, all-inclusive weekend trips were awarded to employees for meeting specific targets. The company included the cost of the weekends as a taxable benefit to employees, and reimbursed part of the taxes resulting from the income inclusion.

The company chose to host the weekends in full service hotels capable of accommodating large groups. In the 1994, 1995, and 1996 taxation years, Digital used Clevelands House Resort, Deerhurst Resort, Chateau Whistler, Isaiah Tubbs Resort, the Château Bromont Resort Hotels, the Delta Lodge at Kananaskis, Le Château Montebello, and L'Esterel. Digital claimed $453,980 each year for the trips. The Minister of National Revenue (the Minister) disallowed the claims on the grounds that they were not deductible under subparagraph 18(1)(l)(i) of the Income Tax Act (the Act), which states:

18.(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of [...]

(l) an outlay or expense made or incurred by the taxpayer after 1971;
(i) for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility, unless the taxpayer made or incurred the outlay or expense in the ordinary course of the taxpayer's business of providing the property for hire or reward, or
(ii) as membership fees or dues (whether initiation fees or otherwise) in any club the main purpose of which is to provide dining, recreational or sporting facilities for its members;

In the Minister's opinion, the locations were lodges and the related expenses could not be claimed. The company conceded that $19,000 of the $453,980 claimed each year was for golf fees and that this amount should be disallowed, but appealed the remaining $434,980 for each of the three years in question. Both the taxpayer and the Crown agreed to have the 1994 claim reviewed by the court and the decision applied to the claims for 1995 and 1996.

In order to determine the type of accommodations used, the court reviewed descriptions of four of the hotels (Clevelands House Resort, Deerhurst Resort, The Delta Lodge at Kananaskis and Château Bromont Resort Hotels) agreed upon by the parties as representative of all the hotels in question. To provide further description, all the properties have more than 200 rooms and are located in country settings with modern amenities and recreational facilities at the hotel or nearby. Only one property used the term "lodge" to describe itself, and that was merely in reference to the main building on the site; most hotels described themselves as resorts.

The Minister conceded that the expenses were incurred for the purpose of gaining or producing income from a business, but the issue of whether or not the expenses were prohibited by paragraph 18(1)(l) remained. The Crown took the position that the ordinary meaning of "lodge" was broad enough to include a hotel. Counsel for the taxpayer countered that "lodge" usually describes small, rustic, seasonal accommodation, and submitted that hotels occasionally use the word "lodge" for marketing purposes. The court agreed with this submission, and went on to state:

It is not necessary for purposes of this appeal to determine a precise meaning of "lodge." I am not sure that there is one. At one end of the spectrum, "lodge" clearly applies to small rustic dwellings used for fishing and hunting. At the other end, it clearly does not apply to large modern hotels located in cities. It is not necessary that I consider where the line should be drawn for purposes of paragraph 18(1)(l). In my view the common meaning of "lodge" does not include large resort hotels of the type that are at issue in this appeal.

In allowing the appeal, the court stated:

For these reasons, I have concluded that the word "lodge" as used in paragraph 18(1)(l) does not apply to large hotels of the type that are at issue in this appeal. In my view the word "lodge" is not commonly used to describe these types of hotels, and if Parliament had wanted to deny a deduction for using these types of hotels, other words would have better described this intent.

It is interesting to note that the Canada Revenue Agency (CRA) has stated in the past that it will not apply a broad interpretation to the words lodge or camp. If a taxpayer uses a resort property for genuine business purposes, the CRA has stated that it will not challenge the expenses under paragraph 18(1)(l) of the Act; yet that is precisely what it did in this case.

Perhaps in the future, government will realize that reasonable, legitimate business expenses for yachts, lodges, and golf are not counter to the social values of Canadians and repeal paragraph 18(1)(l), which has been in effect since 1972.

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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.