Principal Issues: [TaxInterpretations translation]
Are expenses relating to the purchase of goods such as a musical instrument, a Blu Ray player and an electronic game console included in the concept of "entertainment", which would have the effect of making them subject to subsection 67.1(1) of the Income Tax Act?
Position:
We are of the view that subsection 67.1(1) does not apply to such expenses.
Reasons:
Since the Act and case law do not define the word entertainment, the ordinary meaning of the word must be adopted.
March 4, 2010
Montreal Tax Services Office Headquarters Appeals Division Income Tax Rulings Directorate Attention: Marie-France Pleau 2009-033738
Meaning of "entertainment" for the purposes of subsection 67.1(1)
This is further to your email of August 18, 2009 regarding the above subject. You are seeking clarification of the scope of the word "entertainment" as it relates to the application of subsection 67.1(1) of the Income Tax Act (the "Act").
You are of the opinion that despite interpretation 2003-0000025 issued by the Income Tax Rulings Directorate, an object such as a book should not be considered entertainment.
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
In particular, you presented us with the case of a taxpayer carrying on a business in XXXXXXXXXX, who, with the stated purpose of obtaining a contract from a major corporation, offered an employee, responsible for purchases for that corporation, various gifts such as a musical instrument, a Blu Ray disc player, an electronic game console, and other items with a total value of approximately $15,000.
You wish to know if these gifts are subject to the application of subsection 67.1(1) and, therefore, have their deductibility reduced to 50% of their cost.
Our Comments
Subsection 67.1(1) provides that an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is deemed to be 50% of the lesser of
(a) the amount actually paid or payable in respect thereof, and
(b) an amount in respect thereof that would be reasonable in the circumstances.
The Act does not include a definition of entertainment, but subsection 67.1(4) specifies that entertainment includes amusement and recreation.
It has long been established in the field of statutory interpretation that the words of an Act are to be read in their entire context and in their ordinary and grammatical sense harmoniously with the scheme of the Act, the object of the Act and the intention of the legislature.
The French version of subsection 67.1(1) uses the expression "divertissements pris par des personnes", while the English version uses the term "enjoyment of entertainment".
The CRA has already clarified in Interpretation Bulletin IT-518R, Food, Beverages and Entertainment Expenses (the "Bulletin") that "enjoyment of entertainment" is limited to events or services. Examples of such events or services can be found in paragraph 18 of the Bulletin. In addition, the origin of section 67.1 can be traced to a document entitled "Direct Tax Reform" issued by the Minister of Finance on June 18, 1987, in which the Minister of Finance expressed his intention to restrict the deduction for "business meals and entertainment expenses". On pages 91 and 92 of that document, it states the following:
As part of the broadening of the tax base to permit lower tax rates, the deduction for business meals (including food and beverages) and entertainment expenses (such as accommodation at a resort and tickets for the theatre, a concert, athletic event or other performance) will be limited to 80% of their cost.
Finally, in Stapley v. R. (endnote 1), Sexton J. expressed the view that subsection 67.1(1) would not apply to expenses for the purchase of goods such as books or flowers.
In light of paragraph 18 of the Bulletin, the purpose of subsection 67.1(1) and the comments of the Federal Court of Appeal in Stapley, we are of the view that the use of the expression "enjoyment of entertainment" refers to the act of being entertained rather than to tangible property such as a book, musical instrument or Blu Ray disc player, the use of which could potentially provide a form of entertainment. Thus, the deductibility of expenses relating to the purchase of such property would not be reduced by half by the application of subsection 67.1(1).
Furthermore, we would like to bring to your attention that the value of gifts received by the purchasing employee can be included in the employee's income under paragraph 6(1)(a) even if the gifts are given by someone other than the employer.
Adding these amounts to the employee's income would remove any ambiguity as to the application of subsection 67.1(1). Paragraph 67.1(2)(d) provides that subsection 67.1(1) does not apply to an amount paid or payable by a person in respect of entertainment, where the amount is required to be included in computing any taxpayer's income because of the application of section 6 in respect of that entertainment enjoyed by the taxpayer or a person with whom the taxpayer does not deal at arm's length.
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 your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.
ENDNOTES
1 2006 D.T.C. 6075 (F.C.A.) [Stapley].