Principal Issues: Whether a self-employed person who uses a computer for both business and personal use can claim a reasonable portion of internet connection fees as a business expense.
Position: It is a question of fact depending on the circumstances.
Reasons: Under subsection 9(1) of the Income Tax Act (the "Act"), a taxpayer's income from a business or property is the "profit" therefrom for the year, subject to the particular rules in Part I of the Act.
May 30, 2005
Edmonton Tax Services Office HEADQUARTERS Ms. Sue Sohnle Charles Rafuse Client Services Division 613-957-8967
2005-013043 Internet Connection Fees
This is in reply to your email of May 12, 2005, concerning internet connection fees.
Specifically, you have asked whether a self-employed person who uses a computer at home for both business and personal purposes can claim a reasonable portion of internet connection fees as a business expense.
Our Comments
Under subsection 9(1) of the Income Tax Act (the "Act"), a taxpayer's income from a business or property is the "profit" therefrom for the year, subject to the particular rules in Part I of the Act. Paragraph 18(1)(a) provides that no outlay or expense is deductible in computing the income of a taxpayer from a business or property, unless it was made or incurred for the purpose of gaining or producing income. Paragraph 18(1)(b) provides that capital outlays are not deductible except as expressly permitted in Part I of the Act. Paragraph 18(1)(h) denies the deduction of personal or living expenses incurred by a taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer's business. The deduction of outlays or expenses is also subject to the general rule in Section 67 of the Act that outlays or expenses must be reasonable in the circumstances.
In the case of internet fees, it is our view that, while some other provision of the Act may restrict the deduction (e.g. section 67), if it can be established that the fees are paid by a self-employed person in a taxation year for the purpose of earning income from a business, neither paragraph 18(1)(a) or 18(1)(h) would not specifically deny their deduction. Expenditures for internet connection fees at a home office will likely contain varying degrees of personal and business elements. In order to deduct the expense, the taxpayer will need to show that the expense were incurred for business purposes and some reasonable basis of proration will have to be used to determine what portion, if any, relates to the business activity. As noted in 2003-0022747, it is our opinion that the comments in document #9816945 were meant to apply only to employees claiming a deduction under section 8 of the Act, and thus would not apply to self-employed persons.
We trust this information is helpful.
Charles Rafuse
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch