22 October 2008 External T.I. 2008-0278561E5 - Deductibility of estimated business 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: Can the taxpayer deduct an amount for meals or other out of pocket expenses in computing income from a business based on the per deim amounts received?

Position: No. The deduction must be based on the amounts actually expended.

Reasons: The law.

XXXXXXXXXX 							2008-027856
								Michael Cooke
October 22, 2008

Dear XXXXXXXXXX :

Re: Deductibility of Business Expenses

This is in response to your correspondence of May 14, 2008 and our telephone conversation (Cooke/XXXXXXXXXX ) on October 16, 2008.

You have indicated that you carry on a consulting business through a corporation. Occasionally the corporation provides services on a pro bono basis to assist in the promotion of the business and possibly for other reasons. On these occasions the client would not be billed for consulting services provided but amounts are charged for out of pocket expenses. You indicate that the amounts charged are loosely based on the per diem meal and travel allowance rates that are typically used by certain federal government departments.

You also indicate that it is the corporation's practice to record these per diem amounts received as revenue and to take a corresponding deduction for these same amounts as business expenses. In most cases the per diem amounts received will more or less approximate the amount of the out of pocket expenses actually incurred but you do not retain receipts for these types of expenses.

You ask whether it is acceptable under the Income Tax Act (the "Act") for the corporation to deduct as business expenses amounts based on the per diem amounts received rather than the expenses actually incurred.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Canada Revenue Agency ("CRA") Tax Services Office. However, we offer the following general comments.

Paragraph 18(1)(a) of the Act provides a general limitation that in computing the income of a taxpayer from a business or property, no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred for the purpose of gaining or producing income from the business or property. For the purposes of paragraph 18(1)(a) an outlay or expense will be "incurred" where it has actually been paid by the taxpayer or has otherwise become a legal liability of the taxpayer.

As described in paragraph 3 of Interpretation Bulletin IT-487, General Limitation on Deduction of Outlays or Expenses, even if an outlay or expense has been incurred by a taxpayer for these purposes a deduction may still be denied by another provision of the Act, such as paragraph 18(1)(b) (capital expenditures), paragraph 18(1)(h) (personal or living expenses), section 67 (overall reasonableness) or section 67.1 (meals and entertainment) to name but a few. IT-487 and other CRA publications may be accessed at our website at: http://www.cra-arc.gc.ca. The possible application of these provisions of the Act to your situation remains a question of fact, which can only be determined after all the details have been established and reviewed.

However, assuming the pro bono work performed by the corporation was undertaken for an income earning purpose, it is our view that the corporation's practice of deducting amounts as business expenses based on the per diem amounts received is not acceptable. In Lucy Wanjiru Njenga v. The Queen, 1996 DTC 6593 (FCA) the court had this to say about the burden of proof for deducting amounts under the Act:

"The income tax system is based on self monitoring. As a public policy matter the burden of proof of deductions and claims properly rests with the taxpayer. The Tax Court Judge held that persons such as the Appellant must maintain and have available detailed information and documentation in support of the claims they make."

As such, proper receipts or other documentation should be retained by your corporation to support any business deductions under the Act.

We would also note that section 67.1 of the Act, mentioned above, restricts the deduction for most meals and entertainment expenses that are otherwise deductible under paragraph 18(1)(a) of the Act to 50% of the lesser of actual expenditures and a reasonable amount. For more information on the deductibility of meals and entertainment expenses please refer to Interpretation Bulletin IT-518R, Food, Beverages and Entertainment Expenses.

We trust the above comments are of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch