20 November 2003 Internal T.I. 2003-0039147 - PET RELATED 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.

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

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

Principal Issues:

Are expenses in respect of the taxpayer's dog deductible?

Position TAKEN:

Some expenses may be deductible.

Reasons FOR POSITION TAKEN:

Expenses incurred to earn income in the taxpayer's business are deductible. Personal and capital expenditures are not.

		November 20, 2003

	XXXXXXXXXX 	HEADQUARTERS
	GST/HST Rulings	T. Young
	XXXXXXXXXX 	(613) 952-1506
	XXXXXXXXXX  TSO
		2003-003914

Dog Expenses

We are replying to the letter received from XXXXXXXXXX (the "Taxpayer") dated September 3, 2003, that you forwarded to us for reply. In his letter, the Taxpayer states that he has incurred a number of expenses in respect of his XXXXXXXXXX dog, XXXXXXXXXX (the "Taxpayer's Pet"), who is the subject of a book he wrote in XXXXXXXXXX. The Taxpayer has asked if he can deduct these expenses against his business income earned from the sale of the book, attending book signings, and speaking engagements.

Under subsection 9(1) of the Income Tax Act (the "Act"), a taxpayer's income from a business or property is the "profit" therefrom for the year, subject to the particular rules in Part I of the Act. Paragraph 18(1)(a) 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) provides that capital outlays are not deductible except as expressly permitted in Part I of the Act. 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 deduction of outlays or expenses is also subject to the general rule in Section 67 of the Act that outlays or expenses must be reasonable in the circumstances.

It is first necessary to determine whether a taxpayer's activity is undertaken in pursuit of profit that results in a source of income under the Act, or is a personal endeavour. This is only relevant where there is some personal or hobby element to the activity. Where a personal or hobby element exists, the venture will be considered a source of income only if it is undertaken in a sufficiently commercial manner. For the purposes of this memorandum, we will assume that the Taxpayer has a source of income from a business. If this is not the case, it will not be necessary to evaluate the specific expenditures to determine deductibility, as none of them would likely be deductible.

Based on the information provided, expenditures for the Taxpayer's Pet will likely contain varying degrees of personal and business elements. In order to deduct the expenses, the Taxpayer will need to show that the expenses were incurred for business purposes. In contrast to, for example, a police dog or a dog acquired and trained to perform in television and on film, it is noted that the Taxpayer's Pet was XXXXXXXXXX years old when the book was first published. Where there is both a personal and business element to the expenses incurred and they are not otherwise restricted under the Act, some reasonable basis of proration will have to be used to determine what portion, if any, relates to the business activity. We note that, up until the point when the Taxpayer began using it for business purposes, the Taxpayer's Pet would have been used for personal purposes only and paragraph 18(1)(h) would have prevented the Taxpayer from deducting any of the expenses incurred before that time. In our view, the change in use likely occurred when the Taxpayer began using the animal for public appearances.

We also offer the following comments with respect to the specific issues raised by the Taxpayer:

? Travel expenses - Travel expenses relating to the Taxpayer's Pet would generally be fully deductible providing the primary purpose of the Taxpayer's Pet going on the trip is business-related, not personal. This would include transportation, food and accommodation expenses (including non-refundable pet deposits at hotels) incurred to enable the Taxpayer's Pet to appear on television shows, book signings and speaking engagements.

? Medical expenses - The taxpayer will be able to deduct any incremental medical costs to the extent that the expenditures were not capital in nature and were incurred to earn business income. For example, this may include medical expenses that were necessary to enable the Taxpayer's Pet to travel, such as vaccinations required to enter the United States, provided the vaccinations were not otherwise necessary costs of owning a pet. The incremental medical costs would likely include the surgery, which the Taxpayer has stated was necessary to enable the Taxpayer's Pet to continue to make public appearances. Alternatively, it would have been put down. In either case, the Taxpayer's income would have been adversely affected. Any medical expenses other than the incremental costs would generally be deductible to the same extent as the other general costs of owning and maintaining the Taxpayer's Pet for business purposes.

To the extent that expenses in respect of the Taxpayer's Pet's food are otherwise deductible, section 67.1 would not apply to restrict the deductibility of these expenses.

If you have any questions or if we may be of any assistance, do not hesitate to contact

Terry Young at (613) 952-1506.

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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