Principal Issues: [TaxInterpretations translation] (1) Are expenses for attending a seminar or a lunch meeting incurred by an individual in the course of carrying on a business or earning income from property deductible under section 9 even if there is no direct effect on profit? In other words, are these expenses deductible even if they do not result in a direct increase in income or a decrease in other business expenses?
(2) Does the CRA make a distinction for training expenses incurred to earn property income versus business income?
(3) Is the CRA of the view that the example in this situation - that of a triplex owner who attends property management training courses to improve his knowledge of property management - is similar to the case of a general accountant who wishes to specialize in taxation as described in paragraph 4(b) of Interpretation Bulletin IT-357 R2?
(4) Is a luncheon seminar fee paid by a lawyer attending a conference on recent case law a training expense deductible in computing professional income?
Position: General comments.
Reasons: (1) Assuming that a source of income is derived by an individual from carrying on a business or from an immovable (such as, for example, the management of an income property), paragraph 18(1)(a) of the Act does not, in and of itself, preclude the deduction of reasonable training expenses incurred by the individual in the course of activities that generate income from property or a business provided that those expenses are not capital in nature.
(2)With the exception of certain specific provisions in the Act or the Regulations (for example, convention expenses in subsection 20(10), the restriction on capital cost allowance for a rental property in subsection 1100(11) of the Regulations, etc.), the Act does not generally provide a distinction between an expense incurred to earn income from a business and an expense incurred to earn income from property.
(3) Assuming that the operation of a triplex by an individual is commercially viable and that a source of income exists (property or business), we are of the view that reasonable expenses incurred by the individual to attend property management training courses to improve the individual's knowledge of property management would be deductible in computing rental income to the extent that they do not provide the individual with an enduring benefit.
(4) Generally, fees for registration in a luncheon seminar are deductible in computing income from a profession under subsection 9(1) provided they are reasonable. However, if the registration fee is for food, beverages or entertainment, section 67.1 provides special rules restricting the deductibility of expenses incurred in respect of such fees.
XXXXXXXXXX 2009-034758 Danielle Bouffard April 28, 2010
Dear Sir,
Subject: Training costs
This is in response to your fax dated November 2, 2009, in which you requested our opinion on the deductibility of certain training expenses.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
The facts of the particular situation are as follows.
An individual incurred expenses to attend a convention, seminar, luncheon meeting, or other meeting the purpose of which was to acquire, maintain, or update a skill used in the course of operating a business or an immovable. The amount of these expenses was reasonable in the circumstances. These expenses were not tuition fees paid to certain educational institutions that are eligible for a tax credit.
The training activities were not provided at a recognized resort. If certain training activities were found to be for conventions, the deduction of the expenses so incurred would be subject to the limitations in subsection 20(10).
For example, you raised the situation of an individual who owns a triplex and who registers for property management training courses to improve the individual’s knowledge in this area. The goal is to be able to better manage the individual’s building and obtain better knowledge in order to acquire a larger building. Courses can cover, for example, cash flow management, rent collection and contract negotiation.
Your Questions
1. Are expenses for attending a convention, seminar, luncheon meeting or other meeting incurred by an individual in the course of operating a business or an immovable deductible by virtue of section 9 even if there is no direct effect on profits? In other words, are they deductible even if there is no direct increase in income or decrease in other business expenses?
2. Does the Canada Revenue Agency ("CRA") make a distinction for training expenses incurred by an individual to earn property income versus business income?
3. Is the CRA of the view that the example of a triplex owner taking property management courses is similar to the case of a general accountant who wishes to specialize in taxation as described in paragraph 4(b) of Interpretation Bulletin IT-357R2, Training Expenses?
4. Is a luncheon registration fee paid by a lawyer for a conference on recent case law an educational expense that is deductible in computing professional income?
Our Comments
It appears to us that the situation described in your letter and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful.
The Act provides for the deductibility of certain expenses depending on the source of income with which they are associated. Sources of income may be, for example, from employment, business or property. To determine whether a source of income exists, the CRA recommends the following two-stage approach, as advocated by the Supreme Court of Canada:
(1) Is the activity of the taxpayer undertaken in pursuit of profit, which generates a source of income within the meaning of the Act, or is it a personal endeavour (involving a personal or recreational aspect)?
(2) If it is not a personal endeavour, is the source of the income a business or property within the meaning of the Act?
Under the Act, a taxpayer who carries on a business or earns income from property may deduct expenses that were incurred for the purpose of earning income from the business or property. However, the Act specifically prohibits the deduction of expenses that are personal, capital in nature or unreasonable in the circumstances. Similarly, section 67.1 limits the deductibility of expenses for food, beverages and entertainment to 50% of the amount incurred or the amount that is reasonable in the circumstances.
(1) Where a taxpayer carries on a business or engages in a profession or commercially viable activity and incurs training expenses, those expenses may be personal, current or capital expenses. Training expenses that are personal expenses or that are not reasonable in the circumstances are not deductible under paragraph 18(1)(h) or section 67, respectively.
Where training is undertaken to maintain, update or improve a skill in the course of a business, profession or commercially viable activity, inherent costs such as course registration fees, travel, meals and accommodation are deductible as a current expense. Of course, these expenses must have been incurred or made by the taxpayer for the purpose of earning income from a business or property. As discussed in paragraph 2 of Interpretation Bulletin IT-487, General Limitation on Deduction of Outlays or Expenses, in order for an expense to be considered to be made or incurred "for the purpose of", it is not necessary to show that income actually resulted from the particular outlay or expenditure itself. It is sufficient that the outlay or expense was a part of the income-earning process.
However, the deductibility of certain expenses may be subject to certain limits set out in the Act, such as the 50% rule in section 67.1 for food, beverages or entertainment.
Training costs are not deductible as current expenses and are considered to be capital expenditures under paragraph 18(1)(b) if the training course to which they relate provides a lasting benefit to the taxpayer. Paragraphs 2 and 3 of IT-357R2 provide some examples of training expenses that are considered to be a capital expenditure.
As stated in paragraph 9 of IT-357R2, a training course should be distinguished from a convention. Unlike a training course, which generally has a classroom format for teaching a subject in accordance with a formal course of study, a convention does not normally have a classroom format and those attending are normally not expected to study text-books, prepare assignments or take tests. In addition, a convention does not become a training course when some of its sessions take the form of workshops. Although convention expenses may provide a lasting benefit to the taxpayer, the taxpayer may deduct these expenses in computing income under subsection 20(10), subject to the limitations contained in that subsection.
(2) In our view, with the exception of certain specific provisions in the Act or the Income Tax Regulations (for example, convention expenses in subsection 20(10) and the restriction on capital cost allowance for rental property in subsection 1100(11) of the Regulations), the Act does not generally provide for a distinction between an expense incurred to earn income from a business and an expense incurred to earn income from property. Consequently, where a source of income exists, either property or business income, reasonable training expenses incurred by a taxpayer to earn income from that source are generally deductible to the extent that they do not produce a lasting benefit to the taxpayer.
(3) In general, where an individual holds real property, the nature of the activity of leasing the real property will determine whether or not it constitutes a business of the individual. Interpretation Bulletin IT-434R, Rental of Real Property by Individual, outlines the criteria for determining the nature of rental income. This Bulletin is available on the CRA Internet site at http://www.cra-arc.gc.ca/E/pub/tp/it434r/READ-ME.html.
Assuming that the activity of managing a triplex by an individual is commercially viable and that a source of income exists (property or business), it is our view that reasonable expenses incurred by the individual to take property management training courses to improve the individual’s knowledge in this area would be deductible in computing rental income as long as they do not provide a lasting benefit to the individual. If the management of the triplex is commercially viable but involves a personal aspect, an allocation of expenses must be made on a reasonable basis in order to determine the amount of expenses inherent in the commercial activity that could be deducted in determining income from the property management activity.
(4) Generally, the registration fees incurred by an individual in connection with a luncheon seminar are deductible in computing income from a profession under subsection 9(1) provided that they are incurred to maintain, update or upgrade a skill for the purposes of that profession and are reasonable in the circumstances. However, if such fees are for food, beverages or entertainment, section 67.1 provides special rules that restrict the deductibility of expenses incurred in respect of such fees. In this regard, an example of the application of section 67.1 is given in paragraph 16 of Interpretation Bulletin IT-518R, Expenses for Food, Beverages and Entertainment. This Bulletin can be found at http://www.cra-arc.gc.ca/F/pub/tp/it518r/LISEZ-MOI.html.
We hope that these comments will be of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.