2 October 2013 External T.I. 2013-0503581E5 - Deductibility of boat 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 expenses for travel from a cottage to the mainland by a boat owned by the taxpayer are deductible; whether expenses for using that boat to entertain clients are deductible

Position: Not likely

Reasons: The law

XXXXXXXXXX
2013-050358
Whitney Dunn

October 2, 2013

Dear XXXXXXXXXX:

RE: Deductibility of personal boat expenses

This is in response to your email of September 4, 2013, where you asked for our views on whether a taxpayer can deduct expenses for his personal boat in computing his business income for the year under the Income Tax Act (the "Act").

Briefly, we understand that your client (the "taxpayer") provides maintenance management services for buildings. He operates the business from an office in his home, and we presume the majority of his clients' buildings are located in the same or a nearby metropolitan area. He spends approximately three months per year at his cottage, which is only accessible by boat. If he needs to travel to a client during his stay at his cottage, he takes his boat to the mainland and then travels by automobile to their location. Occasionally, he entertains clients on the boat.

You want to know whether the taxpayer can claim capital cost allowance and operating expenses for the use of the boat for either of those purposes.

Our comments

Written confirmation of the tax consequences that apply to proposed fact situation is given by this Directorate only in the context of an advanced income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency 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 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 general comments that may be of assistance.

Subsection 9(1) of the Act provides that a taxpayer's income from a business is, subject to any other specific rule in Part I, the taxpayer's profit from that business. The general limitations on business expenses are set out in section 18. Paragraph 18(1)(a) provides that no outlay or expense is deductible in computing the income of a taxpayer from a business unless it was made or incurred for the purpose of gaining or producing income. Paragraph 18(1)(b) prohibits the deduction of capital outlays unless they are expressly permitted under Part I. 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 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.

If an expense would exist absent any business need that is a strong indication it is personal in nature. Generally, expenses incurred to make an individual available to the business, or incurred in travelling from home to the business, are considered personal expenses as an individual is expected to be available to the business to earn business income. Moreover, section 67 may limit any such expenses to a lesser amount even if they were found to be otherwise deductible.

While a mixed question of fact and law, in our view, it appears that no amounts would be deductible for the boat as current or capital expenses since the taxpayer appears to need the boat to access the cottage and such need, which is personal in nature, would exist independent of any business need. The additional travel expenses which result from the taxpayer's decision to live at the cottage may also be unreasonable.

Finally, paragraph 18(1)(l) of the Act prohibits the deduction of any expenses for a yacht. The Act does not define yacht; however, the courts have interpreted the phrase more broadly than might be expected from common usage. For instance, in R. v. C.I.P. Inc., 88 DTC 6005 (FCTD), the court considered a yacht to be a vessel that was primarily or generally used as a pleasure craft. If the taxpayer's boat is a yacht for the purposes of the Act, no amounts could be deducted for it. Please refer to the comments in paragraph 2 of Interpretation Bulletin IT-148R3, "Recreation Properties and Club Dues".

We trust that these comments will be of assistance.

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