Principal Issues: Deductibility of expenses incurred by a shareholder
Position: Not deductible
Reasons: In our view, the expenses are personal expenses within the meaning of paragraph 18(1)(h) of the Act. Consistent with the positions taken by the CRA in the past and the wording of the Act.
2005-015746 XXXXXXXXXX Anne Dagenais, M. Fisc. (613) 957-2121 April 6, 2006
Dear Sir,
Subject: Deductibility of expenses incurred by a shareholder
Request for a technical interpretation
This is in response to your letter of October 14, 2005, in which you requested our opinion as to the deductibility of expenses incurred by a shareholder of a corporation to attend the annual meeting of shareholders.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Facts
The taxpayer is a corporation holding several million in securities.
The taxpayer's only activity is to earn income from property.
The taxpayer incurs airfare and hotel expenses to attend a general meeting of shareholders in connection with one of its share investments.
Your Opinion
You are of the view that those expenses are deductible for the following reasons:
- The taxpayer incurred those expenses for the purpose of earning income from property. Consequently, that meets the definition in section 9 which states that the income of a taxpayer from a business or property for a taxation year is the profit therefrom for that year.
- In addition, you are of the view that that expense does not constitute a personal or living expense as defined in subsection 18(1)(h) since those expenses would not have been incurred had the taxpayer not made any investments for the purpose of earning income.
- Also, expenses incurred for travel and hotels are reasonable expenses and, therefore, cannot be limited under section 67.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue written opinions on proposed transactions otherwise than by way of advance 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. These comments may, however, under certain circumstances, not apply to your particular situation.
Under section 9, a taxpayer's income from a business or property for a taxation year is the taxpayer's profit from that business of property for the year. Case law requires that profits from a business or property be accounted for in a manner that is consistent with the Act, established case law and generally accepted business principles. Where a taxpayer incurs expenses for the purpose of earning income from property or a business, those expenses will generally be deductible under the Act.
Paragraph 18(1)(a) denies 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 business or property. In addition, paragraph 18(1)(h) explicitly disallows the deduction of personal or living expenses of the taxpayer, other than travel expenses “incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business.”
Whether travel expenses constitute personal expenses for a taxpayer or expenses incurred or made for the purpose of earning business income while away from home is a question of fact that can only be resolved after considering all the facts relevant to a particular situation.
If an expense is found to be deductible, you will note that section 67 provides that an expense, to be deductible, must always be reasonable in the circumstances. That determination is one of fact that is made following an assessment of all the relevant terms and conditions.
Travel and accommodation costs
Based on the facts you have presented to us, it would appear that costs have been incurred in connection with a shareholder's attendance at an annual meeting to vote on resolutions and elect competent directors, thereby maximizing the return on the shareholder’s investment. The combination of those two factors may result in increased profits or reduced losses which would increase the corporation's ability to pay dividends.
However, we regret that we cannot share your opinion. We are of the view that the travel and living expenses incurred are not deductible to the corporation on the basis that, in our view, the expenses incurred by a shareholder of a corporation in attending the annual meeting constitute personal and living expenses within the meaning of paragraph 18(1)(h). As noted above, that paragraph limits the deduction of such expenses to those incurred by a taxpayer in the course of carrying on a business so that in this case such expenses would not be deductible by the taxpayer in computing income from a business.
This decision is based on the current Act and does not take into account the proposed amendments.
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
We hope these comments are of assistance. If you require any additional information regarding the content of this document, please do not hesitate to contact us.
Best regards,
Phil Jolie
Director
Business and Partnerships
Income Tax Rulings Directorate