Principal Issues: [TaxInterpretations translation] Could the costs of testing for XXXXXXXXXXX bacteria be deductible expenses in computing a taxpayer's income?
Position: Probably.
Reasons: Question of fact. Application of paragraph 18(1)(a) of the Income Tax Act.
XXXXXXXXXX 2009-035898 Lucie Allaire, Advocate, D. Fisc. June 24, 2010
Dear Madam,
Subject: Deductibility of expenses –Testing for XXXXXXXXXX bacteria
This is in response to your email dated February 24, 2010 in which you requested our opinion regarding the deductibility of expenses related to the testing for XXXXXXXXXX bacteria, and in light of additional information provided in a telephone exchange (XXXXXXXXXX/Allaire).
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
You referred to a business that offers testing services for XXXXXXXXXX bacteria to clients, either individually or on a lump sum basis. More specifically, the company performs analysis for the detection of XXXXXXXXXX bacteria in cooling tower systems, evaporative condensers and other systems deemed at risk.
Your Question
You are asking whether clients of the business can deduct the cost of testing for XXXXXXXXXX bacteria in computing their 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 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.
Paragraph 18(1)(a) provides that in computing the income of a taxpayer from a business or property no deduction shall be made in respect of 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;
Respecting the expression "...for the purpose of earning income....” in paragraph 18(1)(a), it is not necessary to prove that the income is actually derived from a particular expenditure in itself. It is sufficient that the outlay or expense is part of an activity of the earning process.
The application of the rules under subsection 18(1)(a) remains a question of fact that can only be determined after consideration of all the facts and circumstances of a particular situation.
However, in light of the above and to the extent that the expenses incurred are reasonable in the circumstances, it is our view that the cost of testing for the bacterium could be a deductible expense in computing a taxpayer's income under paragraph 18(1)(a).
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.