20 October 1995 External T.I. 9520875 - "Reasonableness" of expense & Tax-free Allowances

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

whether individual or total expenses considered in determining "reasonableness" of an expense and whether a MP must all for all income received including any tax-free allowances before s/he may deduct expenses

Position:

individual and total expenses considered. While the Dept has no authority to require an itemized accounting of an allowance which is exempted from income by statute, the fact that a tax free allowance has been received would be taken into consideration in determining the "reasonableness" of an expense which one seeks to deduct if the purpose of the allowance is to defray that type of expense for which a deduction is sought

Reasons:

		952087
XXXXXXXXXX	Sandra Short

October 20, 1995

Dear XXXXXXXXXX:

Re: Reasonableness of Expenses incurred by a Member of Parliament

This is in reply to your letter of July 25, 1995 which queries whether only individual expenditures are considered or whether the total of all expenses being deducted is also considered in determining the "reasonableness" of an expense. You have also asked whether a member of Parliament must give an accounting of all income received, including any tax-free allowances, before he or she may deduct expenses. If not, you have asked how the Department can determine whether or not the total amount of job-related expenses are reasonable in the circumstances.

Section 67 of the Income Tax Act provides that no deduction shall be made "in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances". Reasonableness may be examined at both the individual expense and total expense level. In determining whether an individual expense is reasonable "in the circumstances" one would look to the amount sought to be deducted, the purpose of the expenditure, the nature of the expenditure, the similarity to and amount of other such expenses claimed, expenses of other employees or officers employed in a similar capacity, and so on, including consideration of any tax free allowances which may have been received where the allowance has been received for the purpose of defraying the type of expenditure which is being deducted. In No. 511 v. M.N.R. (Tax Appeal Board) 58 DTC 307, the Board considered as unreasonable a claim of $22,500 for advertising expenses incurred by a lumber company in sponsoring local sports events and reduced the deduction to $5,000, having given consideration to the size of the taxpayer's business, the patronage to be expected, the form of the advertising, the locality and the size of the population reached by the advertising.

There is no standard or gauge to determine reasonableness and thus the courts may freely determine what is reasonable in any assessment that is appealed. Clearly what is reasonable in any situation can only be determined on a case by case basis.

As you are aware, an individual carrying on business can generally deduct reasonable expenses to the extent they are incurred to earn income from that business. Even before invoking section 67 of the Act, employees or officers are far more restricted in the types of expenses which may be deducted in calculating income from an office or employment. A member of Parliament would be able to deduct travelling expenses only if the travel were incurred in carrying out the duties required of that member and only if all the other conditions for deductibility of an expense by an employee were met.

You have asked whether an accounting of a tax-free expense allowance must be made prior to permitting a member of Parliament a deduction for expenses incurred in earning the income from his or her office or employment. An allowance has been defined by the courts as a payment for which the recipient does not have to account. The Department has no authority to require an itemized accounting of an allowance which is exempted from income by statute. Having said that, however, where a member sought to deduct an expense for which a tax free allowance had been received and the purpose of the allowance was to defray that type of expense for which the member sought a deduction, the fact that a tax free allowance had been received would be taken into consideration in determining the "reasonableness" of the deduction.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and Interpretations
Directorate
Policy and Legislation Branch