26 August 2013 External T.I. 2013-0502151E5 - Deductible 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: Whether amounts paid by a corporation for university tuition and living expenses of a relative of the corporation's shareholder are deductible? Are these amounts taxable to either the shareholder or the shareholder's relative?

Position: The amounts paid by the corporation are not deductible. They would also be considered benefits conferred by the corporation to the shareholder by virtue of subsection 15(1) and 56(2).

Reasons: The law.

XXXXXXXXXX
2013-050215
S. D'Angelo

August 26, 2013

Dear XXXXXXXXXX:

Re: Non-Deductible Expense and Shareholder Benefit

This is in response to your correspondence of July 27, 2013 and our telephone conversation (XXXXXXXXXX/D'Angelo), concerning the income tax treatment under the Income Tax Act ("Act") of payments made by your corporation to XXXXXXXXXX (who is 18 years of age and not an employee or shareholder of the corporation) for XXXXXXXXXX university tuition fees and living expenses.

Our Comments

Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office ("TSO") during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Notwithstanding the foregoing, we are prepared to provide the following comments.

Paragraph 18(1)(a) of the Act 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) of the Act also provides that capital outlays are not deductible unless they are expressly permitted under Part I of the Act. Paragraph 18(1)(h) of the Act 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 deductibility of any outlay or expense is also subject to the general rule in section 67 of the Act that such amounts be reasonable in the circumstances.

Based on our understanding of the facts, the amounts paid by your corporation to XXXXXXXXXX are personal or living expenses and have not been incurred by the corporation for the purpose of gaining or producing income. As such, these payments would not be deductible by your corporation. In addition, these amounts appear to result in a taxable shareholder benefit to you by virtue of subsections 15(1) and 56(2) of the Act.

Subsection 15(1) of the Act provides that where a benefit is conferred by a corporation on a shareholder (or to a person in contemplation of the person becoming a shareholder) the amount or value of that benefit is included in the shareholder's income for the year (with certain limited exceptions which do not appear to apply in your fact situation). As indicated in paragraph 7 of Interpretation Bulletin IT-335R2, "Indirect Payments", amounts paid by a corporation to another person may still be considered as a benefit conferred by a corporation on a shareholder by virtue of subsection 56(2) of the Act. In particular, paragraph 7 of IT-335R2 states:

"Pursuant to the direction of, or with the concurrence of, its shareholders, a particular corporation makes gifts to relatives of the shareholders. These relatives are not shareholders or employees of the particular corporation. In such a situation, subsection 56(2) would apply to include in the shareholders' income the fair market value of the gifts made by the particular corporation. These gifts would constitute payments or transfers of property pursuant to the direction of, or with the concurrence of, the shareholders to some other persons (i.e. their relatives) as a benefit that the shareholders desired to have conferred on their relatives. Furthermore, an amount corresponding to the fair market value of the gifts would have been included in the shareholders' income under subsection 15(1) if the payments or transfers had been made by the particular corporation to the said shareholders. In this situation, each shareholder that directed or acquiesced in the payments or transfers would be taxable under subsection 56(2) on a portion of the payments or transfers made by the particular corporation that is equal to the proportion of the number of issued and outstanding shares of the corporation owned by the shareholder to the total number of shares that are in fact issued and outstanding."

We trust our comments will be of assistance.

Yours truly

Michael Cooke, C.P.A., C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch