Principal Issues: [TaxInterpretations translation] Can a taxpayer who carried on a business as a consultant and personal stylist deduct the costs of her clothing, hairdressing and dry cleaning from her business income?
Position: No, those are personal or living expenses under paragraph 18(1)(h) of the Income Tax Act.
Reasons: Income Tax Act, case law analysis, position set out in interpretation bulletins.
2006-021764
XXXXXXXXXX Anne Dagenais
(613) 957-2121
January 16, 2007
Dear Sir,
Subject: Request for technical interpretation - deductibility of clothing expenses
This is in response to your letter of October 24, 2006, in which you asked for our opinion regarding the above subject. We apologize for the delay in responding to your question.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Facts
Your question concerns the case of a self-employed person who runs a business as a personal consultant and stylist. The services offered are as follows:
- Wardrobe reorganization
- Selection, alteration and recycling of clothing
- Coordination of clothing and purchase recommendations.
The type of business the taxpayer operates requires her to present herself in an impeccable manner. For example, the taxpayer must incur significant costs for clothing, hairdressing and dry cleaning.
Questions
You wish to determine whether the taxpayer can deduct the above costs from her business income.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate 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. These comments may, however, under certain circumstances, not apply in full to the situation you have submitted to us.
In computing a taxpayer's income from a business or property, subsection 18(1) provides that the following items are not deductible:
(a) 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;
(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;
[...]
(h) 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;
Paragraph 20(1)(a) provides that a taxpayer may deduct, notwithstanding paragraphs 18(1)(a), (b) and (h), in computing income from a business or property, such portion of the capital cost of the property to the taxpayer, or such amount in respect of such cost so incurred, as is allowed by regulation. In order for a taxpayer to claim capital cost allowance in respect of a property, such property must have been acquired for the purpose of earning income from a business.
In this context, paragraph (i) of Class 12 of Schedule II to the Income Tax Regulations (the "Regulations"), which allows for a 100 per cent depreciation rate, provides that a uniform may be included in this class. In addition, paragraph (i) of Class 8 of Schedule II to the Regulations includes in this class a tangible capital asset, such as a costume, that is not included in any other class. This class allows a depreciation rate of 20 per cent.
Interpretation Bulletin IT-525R, Performing Artists, discusses the criteria used by the Canada Revenue Agency ("CRA") to distinguish a performing artist who is engaged under a contract of employment from one who is self-employed. It also provides examples of expenses that are deductible by an artist who is carrying on a business where those expenses are incurred to earn income from his or her art. Paragraph 10(l) of the Bulletin states that an artist may claim capital cost allowance (CCA) (Class 8 - deductible at 20 per cent on a declining balance basis) on instruments, sheet music, scores, scripts, transcriptions, arrangements and equipment. However, items l.1 and l.2 specify that wardrobe items are eligible for capital cost allowance only on wardrobe that is acquired by the artist specifically to earn self-employment income. Although this Bulletin does not specifically address your situation, we believe that the criteria set out in it are relevant to the analysis of the situation in this case and provide a better understanding of our position.
We are of the view that a self-employed person has acquired clothing, suits or uniforms for the purpose of earning income - and thus can claim CCA on them - only where they are acquired specifically for the purpose of earning income from self-employment. As a side note, case law has determined that any expense that must be incurred by a person to attend work is normally considered to be an expense of a personal nature.
Thus, where a taxpayer acquires clothing that can be used both in the taxpayer's business activities and in the taxpayer's personal activities, the CRA takes the position that this expense is a personal or living expense that is not deductible because of paragraph 18(1)(h).
We are of the view that the costs of clothing and related cleaning costs of a self-employed person carrying on a business as a consultant and personal stylist are personal expenses that are not deductible from the taxpayer's business income since the clothing may be used otherwise than in the course of carrying on the business. These expenses are also not eligible for capital cost allowance. Similarly, hairdressing expenses incurred by the taxpayer are not deductible since the taxpayer incurs them in order to report for work and are not expenses incurred for the purpose of earning employment income since the taxpayer did not acquire them specifically to earn business income.
These comments are not advance income tax rulings and are not binding on the CRA with respect to any particular factual situation. We hope you find these comments helpful. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate