1 March 2013 External T.I. 2013-0477911E5 - Expenses to host employees and spouses at a resort

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Whether 20(10) will restrict the deductibility of the expenses; 2. Whether 18(1)(l)(i) will restrict the deductibility of the expenses; 3. Whether any other sections will restrict the deductibility of the expenses

Position: 1. No, 2. No, 3. Question of fact

Reasons: 1. Not a convention, 2. Not a lodge, 3. Fact specific

XXXXXXXXXX
2013-047791
K. Robinson

March 1, 2013

Dear XXXXXXXXXX:

Re: Expenses of a Trip to a Resort

We are writing in response to your email of February 11, 2013, regarding the deductibility of certain employer-paid expenses and whether subsection 20(10), subparagraph 18(1)(l)(i) or some other provision of the Income Tax Act (the "Act") would apply to restrict or limit the deduction.

In the situation you described, a corporation carrying on business in Canada (the "Taxpayer") is offering employees and their spouses a week-long trip to a resort located outside of North America. The resort is a large facility that offers all-inclusive pricing for meals, beverages and certain recreational and entertainment activities that are fairly typical for such vacation resorts. The Taxpayer will pay all the expenses for its employees and their spouses and during the stay at the resort, the employees will participate in various meetings including team building sessions and sessions related to improving their understanding of the Taxpayer's business.

Our Comments

Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Ruling, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office ("TSO") during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.

Paragraph 18(1)(a) of the Act 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) of the Act also provides that capital outlays are not deductible unless they are expressly permitted under Part I of the Act. Paragraph 18(1)(h) of the Act 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 deductibility of any outlay or expense is also subject to the general rule in section 67 of the Act that such amounts be reasonable in the circumstances.

As indicated in paragraphs 9 and 10 of IT-357R2, the deduction of convention expenses is specifically covered by subsection 20(10) and as such, one needs to consider whether the expenses are in respect of a convention or a business meeting or training course. As noted in paragraph 1 of IT-131R2, a convention may be defined as a formal meeting of members for professional or business purposes. However, paragraph 11 of IT-131R2 provides that intra-company meetings, seminars, courses, etc. will not be regarded as conventions as far as employees of a company are concerned or its parent, subsidiary or associated companies. As noted above, it remains a question of fact whether a particular meeting or event could be described as a convention, a business meeting or a training course and any such determination, in our view, would require a complete review of the particular facts and circumstances including whether (i) the participants are members or employees of the sponsoring organization and (ii) the particular meeting was for the purpose of training or business-related education.

Subparagraph 18(1)(l)(i) denies a deduction for outlays or expenses made or incurred by a taxpayer for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility. It is a question of fact whether a particular property would be a lodge and if the taxpayer would be "using" the property within the meaning of that subparagraph. However, in Hewlett-Packard (Canada) Co. v. The Queen ("Hewlett-Packard"), the Tax Court of Canada ("TCC") found that a lodge would not include a large, full-service hotel.

Section 67.1 restricts the deduction for most meals and entertainment expenses to 50% of the lesser of the actual expenditures and a reasonable amount that would otherwise have been deductible under the Act. However, paragraph 67.1(2)(d) provides that an employer is not subject to the 50% limitation on allowances or reimbursements for meals or entertainment expenses that are included in an employee's income.

Employees are generally taxable on the value of all economic benefits received or enjoyed by virtue of their employment under paragraph 6(1)(a), subject to certain exceptions. Where an employee is accompanied by a spouse on a business trip, any payment or reimbursement by the employer of the spouse's travelling expenses is a taxable benefit to the employee unless the employer can establish that the spouse's attendance was primarily for business reasons. If it is determined that all or part of the cost or value of a particular trip is a taxable benefit that must be included in the employee's income under paragraph 6(1)(a), the employer would be permitted to deduct the corresponding amount in computing its income.

Subsection 67.1(3) also provides a rule which applies where a fee paid or payable for attendance at conference, convention, seminar or similar event entitles the participant to food, beverages or entertainment and the organizer of the event has not allocated or identified a reasonable portion (based on cost of the fee as pertaining to these benefits). For each day of an event which entitles the participant to such benefits, $50 (or such other amount as may be prescribed) is deemed to be paid or payable in respect of food, beverages and entertainment and the fee for the event will be deemed to be the actual fee paid or payable minus the amount deemed to pertain to those benefits.

We trust that these comments will be of assistance.

Yours truly,

Michael Cooke, C.P.A., C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch