Principal Issues: [TaxInterpretations translation] Does the amount paid for entertainment include incidental transport and accommodation costs?
Position: Question of fact. In this case, yes.
Reasons: Section 67.1 of the Income Tax Act. Jurisprudence.
XXXXXXXXXX 2006-018162 François D. Bordeleau, LL.B. November 8, 2007
Dear Sir,
Subject: Section 67.1 of the Income Tax Act (the "Act")
This is in response to your letter of April 10, 2006, requesting our opinion on the above subject. The facts relating to your request are set out below. We apologize for the delay in responding to your question.
Facts
- The taxpayer is a corporation that invites, at its own expense, major customers to the XXXXXXXXXX;
- The costs incurred by the taxpayer in connection with this entertainment activity include meal expenses, tickets to attend the XXXXXXXXXX, and transportation and accommodation expenses;
- The transportation costs are incurred by the taxpayer in order for the customers to travel to XXXXXXXXXX to enjoy the XXXXXXXXXX;
- Similarly, the taxpayer bears all the accommodation costs of its customers during their stay in XXXXXXXXXX;
You therefore wish to know whether the transportation and accommodation expenses incurred by the taxpayer for the benefit of its clients should be considered as "amounts paid … in respect of … entertainment" within the meaning of subsection 67.1(1).
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Our Comments
Section 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.
Paragraph 67.1(4)(b) provides that, for the purposes of section 67.1, entertainment includes amusement and recreation.
The effect of those provisions is to limit the amount that would otherwise be deductible from the income of the taxpayer incurring such expenses.
The question of whether certain costs fall within the scope of section 67.1(1) is a question of fact that can only be answered after analysis of the circumstances of each case.
According to the supplementary information accompanying the February 22, 1994 budget, Parliament's objective in enacting subsection 67.1(1) is to limit the deductibility of food, beverage and entertainment expenses since those expenses generally contain an element of personal consumption.
In Sie-Mac Pipeline Contractors Ltd. v. Canada1 - where the Supreme Court of Canada and the Federal Court of Appeal interpreted the scope of subsection 18(1)(l) - the taxpayer had invited guests to a fishing lodge in a remote area of British Columbia. The guests were flown in from Vancouver and Edmonton. Although there was a business element to the guests' stay at the lodge, the main purpose of their stay was for entertainment, namely fishing.
In concluding that paragraph 18(1)(l) applied to all expenses incurred by the taxpayer - including transportation costs - the Federal Court of Appeal, and subsequently the Supreme Court of Canada, emphasized Parliament's intention to restrict the deductibility of certain expenses that were more personal in nature.
In this case, we believe that the reasoning of the Federal Court of Appeal and the Supreme Court of Canada in Sie-Mac should guide us as to the scope of subsection 67.1(1). Thus, if transportation costs can be included for "the use or maintenance of a property that is a pleasure boat, lodge, chalet-hotel or golf course or facility", we are of the view that these costs cannot be excluded from the costs covered by subsection 67.1(1). In the present case, and for the reasons stated above, we are of the view that the expenses paid for the transportation and accommodation of the taxpayer's clients must be subject to the 50% limit stipulated in subsection 67.1(1).
Best regards,
Louise J. Roy, CGA
Interim Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.
ENDNOTES
1 [1993] 1 S.C.R. 895, conf. [1991] F.C.J. No. 1083