Principal Issues: [TaxInterpretations translation] Does the amount paid for entertainment include incidental transport costs?
Position: Question of fact. In this case, yes.
Reasons: Section 67.1 of the Income Tax Act.
November 6, 2007 Eastern Quebec Tax Services Office Headquarters Business and Partnerships Section Attention: Claudine Trottier François Bordeleau, Advocate
2005-015209
Section 67.1 of the Income Tax Act
This is in response to your memorandum dated September 21, 2005, in which you requested our opinion on the above subject. We apologize for the delay in responding to your question.
Facts
Your memo states the following facts:
- The taxpayer is XXXXXXXXXX;
- For all the XXXXXXXXXX years, it offered XXXXXXXXXX to its top performing representatives;
- The expenses for this event were approximately $XXXXXXXXXX;
- A significant portion of these costs relate to XXXXXXXXXX transportation;
- You indicated in your memo that the representatives are self-employed and not employees of the taxpayer.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Question
You wish to know whether the transportation costs incurred by the taxpayer for the return transportation of its XXXXXXXXXX representatives should be considered as amounts paid for entertainment for the purposes of subsection 67.1(1).
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 these 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) was to limit the deductibility of food, beverage and entertainment expenses since those expenses generally contain an element of personal consumption.
In interpreting subsection 67.1(1), it is useful to note that the French version of the Act limits the deductibility of amounts that are "payés ou payables pour [...] des divertissements [...]". Similarly, the English version limits the deductibility of amounts "paid or payable in respect of [...] the enjoyment of entertainment [...]". According to the Supreme Court of Canada's decision in R. v. Nowegijick1 , the expression "in respect of" denotes the broadest possible relationship between two elements.
In Sie-Mac Pipeline Contractors Ltd. v. Canada2 - 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 T. Evans Electric v. Canada3 , the Tax Court of Canada ("TCC") had to decide whether air travel expenses incurred in connection with fishing trips fell within the restriction of subsection 67.1(1). The TCC allowed the taxpayer's appeal on the basis that transportation by Cessna aircraft did not constitute entertainment.
In this case, we are of the view 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). On the one hand, the decision in T. Evans Electric does not constitute a precedent in other cases since it originated in the TCC's informal procedure. On the other hand, we believe that paragraph 18(1)(l) is more limited in scope than subsection 67.1(1). Thus, if transportation costs can be included for "the use or maintenance of property that is a pleasure boat, lodge, chalet-hotel or golf course or facility", it is difficult to see how these same transportation costs can be excluded from the costs covered by subsection 67.1(1).
Consequently, we are of the view that subsection 67.1(1) should apply not only to the costs of XXXXXXXXXX that the taxpayer offers to its best performing representatives but also to the costs of XXXXXXXXXX transportation.
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.
Louise J. Roy, CGA
Interim Manager
Business and Partnerships Section
Income Tax Rulings Directorate.
ENDNOTES
1 [1983] 1 S.C.R. 29
2 [1993] 1 S.C.R. 895, conf. [1991] F.C.J. No. 1083
3 [2002] T.C.C. no 536