10 April 2012 External T.I. 2011-0420521E5 - Deductibility of Cost of Trip to Resort

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: Whether expenses incurred to entertain employees and suppliers at a resort are deductible.

Position: Question of fact.

Reasons: It is a question of fact whether the resort is a "lodge" within the meaning of subparagraph 18(1)(l)(i) of the Act and if the taxpayer will use it within the meaning of the same subparagraph. Expenses for hotels, flights, food, beverages and entertainment that are not subject to paragraph 18(1)(l) of the Act are still subject to the provisions of paragraph 18(1)(a) and section 67.1 of the Act.

XXXXXXXXXX 

					2011-042052
					C. Underhill
April 10, 2012

Dear XXXXXXXXXX :

Re: Expenses of Trip to Resort

We are writing in response to your email of September 8, 2011, regarding the deductibility of certain expenses incurred in respect of a trip to a XXXXXXXXXX resort.

In the situation you described, a company is offering an employee and several suppliers a trip to a XXXXXXXXXX resort for business and recreation purposes. You have enquired whether the costs incurred XXXXXXXXXX are deductible in computing the company’s taxable income.

Subparagraph 18(1)(l)(i) of the Income Tax Act (Act) denies a deduction for outlays or expenses made or incurred by a taxpayer for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility. It is a question of fact whether the XXXXXXXXXX resort would be a lodge within the meaning of subparagraph 18(1)(l)(i) of the Act and if the company would be “using” the resort within the meaning of the same subparagraph.

In Hewlett-Packard (Canada) Co. v. Her Majesty the Queen (Hewlett-Packard), the Tax Court of Canada (TCC) addressed the meaning of lodge for the purposes of subparagraph 18(1)(l)(i) of the Act. The TCC found that a lodge does not include large, full-service hotels.

If it is determined that the resort meets the definition of a lodge within the meaning of subparagraph 18(1)(l)(i) of the Act and if the company uses the resort primarily for business purposes, the cost of the resort accommodations and the related expenditures would be deductible, subject to the 50% limitation in section 67.1 of the Act. However, if the resort is used mainly by the company for recreation or entertainment, no portion of the costs would be deductible. Therefore, no deduction would be available even if some business meetings may be involved.

Based on the Hewlett-Packard case, it is our view that the XXXXXXXXXX resort would not likely be a lodge within the meaning of subparagraph 18(1)(l)(i) of the Act. Despite not being a lodge, a deduction for the expenses incurred in respect of the XXXXXXXXXX resort may still be denied by paragraph 18(1)(a) of the Act. Paragraph 18(1)(a) of the Act provides a general limitation in computing the income of a taxpayer from a business or property. No deduction is allowed in respect of an outlay or expense except to the extent that the outlay or expense was made or incurred by the taxpayer for the purpose of gaining or producing income from its business or property. Where only a portion of the expenditures were incurred for the purpose of gaining or producing income from a business, a reasonable percentage of the resort expenditures would be deductible in computing business income. In addition, the business portion of reasonable amounts expended for the airplane tickets and taxis would also be deductible. Taxpayers are responsible for determining the percentage of business use and must be prepared to justify their position if asked by the Canada Revenue Agency (CRA).

Section 67.1 of the Act further 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 the actual expenditures and a reasonable amount. In this situation, a reasonable amount would be limited to the business portion. Subsection 67.1(4) of the Act specifically provides that no amount paid or payable for travel on an airplane, train or bus is to be considered to be in respect of food, beverages, or entertainment.

Employees are generally taxable under the Act on the value of all economic benefits received by virtue of their employment, subject to certain exceptions. If it is determined that the trip is a taxable benefit to be included in the employee’s income under paragraph 6(1)(a) of the Act, the company would be permitted to deduct the corresponding amount for tax. Paragraph 67.1(2)(d) of the Act provides that an employer is not subject to the 50% limitation on allowances or reimbursements for meal or entertainment expenses that are included in an employee's income.

Expenses incurred for green fees and golf equipment rental are not deductible under subparagraph 18(1)(l)(i) of the Act. Where there is a genuine business purpose, reasonable amounts expended for meals and beverages consumed at a golf club are deductible, subject to the 50% limitation in section 67.1 of the Act. The CRA requires that meal and beverage expenses incurred at a golf club be clearly itemized.

For more information, please refer to interpretation bulletins IT-148R3, Recreational Properties and Club Dues and IT 518R, Food Beverages and Entertainment Expenses.

We trust these comments will be of assistance.

Nerill Thomas-Wilkinson
Manager
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch