Principal Issues: [Tax Interpretations translation] Can a taxpayer who runs a business in the form of an erotic website deduct fees for a membership to a fitness center, for breast implants, cosmetic treatments and for costumes and fine lingerie?
Position: Question of fact. In this case no since the expenses appear to be of a personal nature.
Reasons: The Income Tax Act, long-standing position of the CRA.
March 22, 2011
Montreal Tax Services Office Headquarters Income Tax Technical Interpretation Service Business and Partnerships Division Attention: A. Dagenais Michel A. Robert Advocate, M. Fisc. B.A.A. 2010-038755
Self-employed worker--deductibility of various expenses
This is in response to your e-mails of November 18, 2010 in which you requested our opinion regarding the deductibility of various expenses incurred by a self-employed worker.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the “Act").
In particular, you described a situation where a couple, Mr. X and Ms. X, jointly operate an erotic website XXXXXXXXXX. Mr. X takes care of the technical side and Ms. X is the model. The net income of that business is divided equally between Mr. X and Ms. X.
In the course of the business, Ms. X incurs fees for a membership at a fitness center, for breast implants, cosmetic treatments (such as botox injections, rejuvenation and hair removal treatments). and finally for costumes and fine lingerie.
You wish to know if Ms. X can deduct the costs related to these various expenses in computing her business income.
For the purposes hereof, we have assumed that Mr. X and Ms. X are not the members of a partnership.
Our Comments
In computing a taxpayer's income from a business or property, subsection 18(1) provides that the following are not deductible:
General limitation
(a) an outlay or expense 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;
Capital outlay or loss
(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;
[...]
Personal and living expenses
(h) personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business;
Paragraph 20(1)(a) provides that notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation. In order for a taxpayer to claim capital cost allowance ("CCA") in respect of property, such property must have been acquired in order to earn income from a business.
In this context, paragraph (i) of Class 12 of Schedule II of the Income Tax Regulations ("Regulations"), which allows a 100 per cent depreciation rate, provides that a uniform can be included in that class. In addition, paragraph (i) of Class 8 of Schedule II to the Regulations includes in that class a tangible capital property, including costumes, that is not included in another class. That class allows a depreciation rate of 20 percent.
Interpretation Bulletin IT525R-CONSOLID, Performing Artists, provides examples of expenses that are deductible by an artist who carries on a business where those expenses are incurred to earn income from the taxpayer’s craft. Subparagraph 10(l) of the Bulletin states that an artist may claim CCA (Class 8 - deductible at 20 per cent on a declining-balance basis) for instruments, sheet music, scores, scripts, transcriptions, arrangements and equipment. However, subparagraphs (l.1) and (1.2) specify that costumes qualify for capital cost allowance only if the artist acquired them specifically to earn income from a business and used them solely for performances.
We are of the view that a self-employed person has purchased clothing, costumes or uniforms for the purpose of earning income - and accordingly can claim a CCA deduction - only where such property is specifically acquired to earn income from self-employment. Incidentally, the jurisprudence has determined that any expense that must be incurred by a person to report for work is normally considered an expense of a personal nature.
Thus, where a taxpayer acquires clothing that can be used both in the course of the taxpayer's business activities and as part of the taxpayer’s personal activities, the Canada Revenue Agency adopts the position that that expense is a personal or living expense that is not deductible because of paragraph 18(1)(h).
In this case, we are of the view that the costs of clothing, costumes and fine lingerie of a self-employed person who carries on a business in the form of an erotic website are personal expenses that are not deductible against the business income of the taxpayer where such clothing could be used other than in the course of carrying on the business. Those expenses also cannot qualify for capital cost allowance.
Similarly, fees for a fitness center membership, for breast implants, cosmetic treatments (such as botox injections, rejuvenation treatments, and hair removal) incurred by the taxpayer are not deductible since they represent, by their nature, expenses of a personal nature.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Ms. Celine Charbonneau at (819) 994-2898. In such cases, a copy will be sent to you for delivery to the taxpayer.
We hope these comments will be helpful. If you would like additional information regarding the content of this document, do not hesitate to contact us.
François Bordeleau, Advocate
Manager
Business and Partnerships Division
Income Tax Rulings Directorate.