31 August 2004 External T.I. 2004-0078941E5 - training expenses

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: whether amounts paid for coaching services are deductible

Position: general comments provided

Reasons: deductibility depends on particular facts of a situation

2004-007894
XXXXXXXXXX T. Harris
(613) 957-2114
August 31, 2004

Dear XXXXXXXXXX:

Re: Business Coaching Expenses

This is in response to your email message of May 31, 2004 wherein you requested our interpretation as to whether amounts paid to your organization as coaching expenses would be deductible in computing the payor's income for income tax purposes.

You have indicated that your members, who are associates in XXXXXXXXXX, are all self-employed. The XXXXXXXXXX coaching division of your organization teaches these members the fundamentals in:

? Prospecting new clients
? Increasing repeat and referral business and retention of existing clients
? Shifting business focus to higher margin business
? Introducing process and systems into the business
? Create repeatable and sustainable earnings
? Create more efficiency in the business
? Increase the equitable value of the business
? Long-term investment strategy
? Time management
? Internal motivation

You indicate that the overall goal of XXXXXXXXXX is to enable its participants to generate more business income in a more efficient manner. Also, you believe that there are numerous benefits not listed above that are a result of your organization's coaching system and all of them, including those listed above, enhance a member's ability to generate business income.

Our Comments

Unless otherwise stated, all statutory references herein are to the Income Tax Act R.S.C. 1985 (5th Supp.), c. 1 as amended.

The situation outlined in your letter appears to relate to contemplated transactions.

Confirmation of the tax consequences of proposed transactions will only be provided in response to a request for an advance income tax ruling following a review of the relevant facts and documentation. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R5 dated May 17, 2002. We can, however, provide you with the following general comments.

In order for any expense, including the costs of training, to be deductible in computing income from a business, paragraph 18(1)(a) requires that such expenditure must have been made for the purpose of earning income from the business.

The Canada Revenue Agency's general position on training is set out in Interpretation Bulletin IT-357R2 "Expenses of Training". As indicated in the summary comments of this bulletin, by virtue of paragraph 18(1)(b) training costs are not deductible if they are capital expenditures. Training costs will be considered to be capital in nature where the training results in an enduring or long-term benefit to the participant, for example where a new skill or qualification is acquired. Where, however, the training is taken merely to maintain, upgrade or update an existing skill or qualification, the related training expenses will not be considered to be on capital account.

In addition, costs related to training that is of a personal nature or which is not reasonable in the circumstances will not be deductible in computing income by virtue of paragraph 18(1)(h) and section 67, respectively.

As can be seen from these requirements, whether any amounts paid for coaching services by a member to your organization will depend on the circumstances of the particular member. In circumstances where amounts paid by a member have been made for the purpose of earning income from a business, are not personal expenses and are reasonable in the circumstances, the determination of whether such costs are deductible in computing the income of the member will depend on whether a new skill or qualification is acquired or whether the training is taken merely to maintain, upgrade or update an existing skill or qualification.

In the event that a new skill or qualification is acquired such that the training costs are considered to be on capital account, such costs will not be deductible but should qualify as an eligible capital expenditure. For additional information concerning the tax treatment of an eligible capital expenditure, please refer to Chapter 5 of the tax information guide T4002 Business and Professional Income.

We trust that our comments will be of assistance.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch

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