29 September 2000 External T.I. 2000-0047685 - BUSINESS USE OF PRINCIPAL RESIDENCE

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 certain expenses incurred by an employee/shareholder are deductible by the corporation for tax purposes and whether the reimbursement of these expenses are a taxable benefit to the employee?

Position: Question of fact.

Reasons: The expenses must satisfy the criteria in the Act for deductibility of business expenses. To the extent that a reimbursement is not in respect of personal expenses, the employee/shareholder would not have received a taxable benefit.

XXXXXXXXXX 2000-004768
A. Seidel
September 29, 2000

Dear Sir:

Re: Expenses Incurred by Employee/Shareholder

Your letter to Manon Gilbert, Executive Secretary, Trade Policy and Interpretation Directorate was forwarded for our reply on September 15, 2000. You have requested clarification with respect to the deductibility of certain expenses for income tax purposes.

You have described a situation in which an individual, who is both an employee and a shareholder of a corporation which carries on an active business, allows some of the rooms in the individual's principal residence to be used as a "show home" to display the corporation's products. You have queried whether the corporation can pay for and deduct the "business" portion of various expenses related to the principal residence.

Expenses incurred in earning income from a business are normally deductible in computing income to the extent that they are reasonable and are not on account of capital. As well, expenses that are considered to be personal or living expenses of an employee/shareholder of a corporation are not deductible in computing the income of the corporation pursuant to paragraph 18(1)(h) of the Income Tax Act (the "Act"). Whether any particular expense is incurred to earn income from a business or is a personal or living expense is a question of fact that can only be determined after a review of all the particulars of a given situation. There may also be situations where an expense will have a business component and a personal element to the expenditure and a reasonable allocation would have to be done to determine the amount that would be deductible as a business expense for tax purposes.

In the situation where a portion of a principal residence is used for business purposes, there must be a reasonable allocation between the portion that is used to earn income from the business and the portion that is the personal living space of the employee/shareholder. One of the more common methods of determining business use is to make a determination of the total number of square metres of floor space in the principal residence and then determine the percentage of square metres of floor space used by the business. Where there is also a personal use element to any area determined above, then a further adjustment is required to separate the business use and the personal use of that floor space. Paragraph 7 of Interpretation Bulletin IT-352R2 ("IT-352R2") provides an example of how the business use portion of a principal residence is calculated using floor space and then apportioning the various expenses between business and personal use. Although IT-352R2 deals with "Employee's Expenses", the same principle would be applied in determining the amount that a corporation could reimburse an employee/shareholder for the business use of his/her principal residence.

In general terms, where a corporation reimburses an employee/shareholder for business expenses, the individual will not be required to include such reimbursements in computing income. If the corporation reimburses an employee/shareholder for amounts which are in excess of the business use of the principal residence, the corporation will have conferred a taxable benefit on the employee/shareholder. The taxable benefit will be included in income pursuant to paragraph 6(1)(a) of the Act if it is received by the individual as an employee of the corporation or pursuant to subsection 15(1) of the Act if it is received by the individual as a shareholder of the corporation.

Notwithstanding the above, it is our general view that the mortgage payment on the principal residence of the employee/shareholder could not be considered to be a deductible expense to the corporation for tax purposes by virtue of paragraph 18(1)(h) of the Act.

The publications referred to in this letter may be obtained from your local tax services office or from our Internet web site (www.ccra-adrc.gc.ca).

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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