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Principal Issues: [TaxInterpretations translation]
Can the exceptions under 67.1(2)(a) and 67.1(2)(c) apply to restaurant expenses?
Does section 67.1 apply to purchase expenses of XXXXXXXXXX even if those expenses are part of the raw materials (direct cost) of the corporation's activities?
Position: No to the first question. The restaurant expenses do not meet the exception under 67.1(2)(a) since no compensation is received "in the ordinary course of business" and they do not meet the exception under 67.1(2)(c) since the corporation does not specifically state in writing the amounts for entertainment expenses that clients are required to pay. Regarding the second question, XXXXXXXXXX's purchase expenses do not satisfy the exception in 67.1(2)(c) as the corporation does not specifically state in writing the amounts for entertainment expenses that the clients are required to pay.
Reasons: Position expressed in paragraphs 5 and 7 of IT-518R
September 14, 2006
Subject: Request for Technical Interpretation
Application of paragraphs 67.1(2)(a) and 67.1(2)(b) of the Income Tax Act
This is further to your email dated January 20, 2006, in which you requested our opinion on the above subject. You wish to know more precisely whether expenses are deductible according to the general 50% rule or whether they fall under the exceptions and are 100% deductible.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
The stated facts are as follows:
- The corporation is an integrated marketing and communication agency (the "Corporation"). The Corporation provides promotional services to clients.
- As part of its mandate, the Corporation organizes communication campaigns on its clients' products. The Corporation's objective is to raise awareness of its clients' products. In order to carry out its mandate, the Corporation organizes public relations activities such as press conferences, press lunches, XXXXXXXXXX and exhibitions, etc.
- In order to be able to promote the products of its clients, the Corporation will purchase their products. XXXXXXXXXX.
- The Corporation will contract and negotiate with the client the expenses related to the communication campaigns. It submits an estimate of the detailed expenses as an annex to the contract. No invoice is issued to the client; the contract sets out the remuneration and payment terms. Fees are payable according to a schedule indicated in the service contract. The Corporation will also send the client quotes describing more specifically the activities to be organized and those quotes must be approved by the client.
Are the restaurant fees paid by the Corporation for communication campaigns not invoiced directly to the client, although they are indicated in the quotes, 100% deductible? Can the exceptions under paragraphs 67.1(2)(a) and (c) apply?
Taking into account section 67.1 and according to our understanding, should the Corporation consider that the purchases of XXXXXXXXXX are eligible only as to 50% even if those expenses are part of the raw materials (direct expenses) of the corporation's activities?
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate not to issue a written opinion regarding proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received adequate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments which may not apply in full to the situation you have submitted to us.
Section 67.1(1) provides that an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is deemed to be 50% of the amount actually paid.
However, subsection 67.1(2) provides that the restriction in subsection 67.1(1) does not apply to a person where the amount
“(a) is paid or payable for food, beverages or entertainment provided for, or in expectation of, compensation in the ordinary course of a business carried on by that person of providing the food, beverages or entertainment for compensation;”
As stated in paragraph 5 of Interpretation Bulletin IT-518R, Food, Beverages and Entertainment Expenses, any person who in the ordinary course of business provides food and beverages for compensation, such as restaurants, hotels and airlines, is not covered by the provisions of subsection 67.1(1).
In addition, the 50% expense limit also does not apply, inter alia, under 67.1(2)(c) where the amount
"(c) is an amount for which the person is compensated and the amount of the compensation is reasonable and specifically identified in writing to the person paying the compensation;”
As stated in paragraph 7 of IT-518R, under paragraph 67.1(2)(c), the 50% limitation does not apply if the amount paid or payable by a person or partnership for food, beverages, or entertainment satisfies the following conditions:
- it is an amount for which the person is compensated (i.e. paid or refunded);
- the amount of the compensation is reasonable;
- the amount is specifically identified in writing to the person paying the compensation.
With respect to your first question regarding restaurant charges, we believe that it is a question of fact whether, in the ordinary course of business carried on by a person, that person provides food, drink or entertainment for compensation. A question of fact can only be resolved after a full analysis of all the facts surrounding a particular situation. However, based on the information provided herein, since the Corporation appears to provide meals in the ordinary course of its business to the participants in the various events it organizes but does not appear to receive payment for them, it is our opinion that the general rule in subsection 67.1(1) applies to the Corporation since the exception in paragraph 67.1(2)(a) is not satisfied.
With regard to the question of whether the exception in paragraph 67.1(2)(c) can be applied to those same restaurant fees, you stated that the fees paid for communication campaigns were not rebilled directly to the client, even though they were indicated in the estimates.
The purpose of paragraph 67.1(2)(c) is to allow a taxpayer to deduct the full amount of expenses related to food, beverages or entertainment where the taxpayer has clearly indicated to the payer the amount of such expenses included in the bill, so that the payer is subject to the subsection 67.1(1) limit instead of the taxpayer. Thus, if the taxpayer is reimbursed for the expense by a third person, the 50% rule applies to the person paying the reimbursement. In our opinion, the Corporation has not satisfied the requirements of paragraph 67.1(2)(c).
It is the Corporation's responsibility to determine the amount relating to food, beverages or entertainment. Furthermore, the responsibility for accurately disclosing such an amount lies with the Corporation if it wishes to rely on the exception in paragraph 67.1(2)(c).
Given that the purpose of paragraph 67.1(2)(c) is to exempt the taxpayer only where the payer is subject to subsection 67.1(1), we are of the view that the words "specifically identified in writing" used in the wording of paragraph 67. 1(2)(c) assume that there is no ambiguity as to the amount subject to subsection 67.1(1) in the hands of the payer, in order for the taxpayer to be able to rely on the exemption in paragraph 67.1(2)(c).
It is therefore our opinion that the Corporation did not accurately disclose, to its clients paying the reimbursements, the amount of expenses relating to food, beverages or entertainment and that the conditions of paragraph 67.1(2)(c) were not satisfied. The restriction in subsection 67.1(1) would therefore apply to the Corporation so as to limit to 50% the expenses relating to food, beverages or entertainment incurred in the performance of its contracts.
With respect to the second question you submitted to us, it is also our view that paragraph 67.1(2)(c) cannot apply to the XXXXXXXXXX purchases for the same reasons listed above, namely that the Corporation does not specifically identify in writing the amounts for the XXXXXXXXXX purchase expenses that clients have to pay. The intended purpose of paragraph 67.1(2)(c) is therefore not satisfied.
These comments are not advance income tax rulings and do not bind the Canada Revenue Agency with respect to any particular factual situation.
Finally, we regret the delay in responding to your request. Please accept our apologies.
We hope that these comments are of assistance.
Business and Partnerships Division
Income Tax Rulings Directorate
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