Principal Issues: [TaxInterpretations translation] Are expenses incurred in the course of a network marketing business deductible?
Position: Question of fact.
Reasons: First, it is necessary to determine whether a source of income exists. If such a source exists (in this case, a business), it is necessary to examine the various provisions of the Income Tax Act to determine whether the expenses incurred are properly deductible.
XXXXXXXXXX 2009-031955 F. Bordeleau June 3, 2009
Dear Madam,
Subject: Deductibility of certain expenses
This is in response to your email of April 25, 2009 in which you asked our opinion regarding the deductibility of certain expenses. Specifically, you indicated that you carry on a business that is involved in several areas, including the XXXXXXXXXX. You also indicated that you are a partner and distributor in a network marketing company as well as a self-employed worker.
As part of your activities in the network marketing company, in order to be able to operate and remain eligible for commissions, you indicated that you must purchase 200 points per month of products, either for resale or for personal consumption. You wish to know if you can deduct, in whole or in part, the expenses related to this monthly order of 200 points.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Our Comments
The situation you have indicated in your letter is a factual situation that concerns a specific taxpayer. As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice not to provide written opinions on proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you.
The Act provides for the deductibility of certain expenses depending on the source of income with which they are associated. For example, a taxpayer who derives income from an office or employment can only deduct expenses provided for in section 8. Where a taxpayer wishes to deduct expenses related to the carrying on of a business, it is necessary both that the taxpayer demonstrate the existence of a source of income (i.e., the business) and that the expenses be incurred, inter alia, in order to derive income from that business.
To determine whether a taxpayer is carrying on a business, it is generally necessary to use the following two-pronged method:
(1) Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?
(2) If it is not a personal endeavour, is the source of the income a business or property?
The first test is only relevant in cases where the activity has a personal or recreational aspect. Where the nature of the taxpayer's business has a personal aspect, the business will only be considered a source of income if it is carried on in a sufficiently commercial manner. In order for an activity to qualify as commercial in nature, the taxpayer must have a subjective intention to make a profit and there must be evidence of a serious business person's conduct supporting that intention. You will recognize that the determination of the existence of a source of income is a question of fact that can only be resolved in light of all relevant circumstances.
If a source of income exists, a deductibility review is necessary to determine whether the expense in question falls within the relevant provision or provisions of the Act. For example, paragraph 18(1)(a) provides a general exception to the deductions allowed in computing a taxpayer's income from a business or property by denying the deduction 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 property or business. It is important to note here that an expense, which is otherwise deductible under the Act, may only be deducted if it is reasonable.
Other provisions of the Act may also restrict or prohibit the deductibility of certain expenses. For example, where a taxpayer incurs expenses for food, beverages and entertainment and such expenses are incurred for the purpose of earning income from property or a business, section 67.1 provides that the amount deductible in respect of food, beverages or entertainment is deemed to be 50% of the lesser of the amount actually paid or payable for such expenses and the amount that it would be reasonable in the circumstances to pay for such expenses.
In your situation, since it is impossible for us to know the nature and purpose of the expenses incurred in respect of the 200 points per month of products, we cannot say that these expenses are deductible in computing your business income. However, we hope that the above comments will be of assistance.
We hope that these comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.