3 October 2022 External T.I. 2021-0882861E5 - Deductibility of future storage costs

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 costs incurred by a spouse of a business owner for the storage and maintenance of patient records after the cessation of a professional medical practice are deductible.

Position: Question of fact. Where the future storage and maintenance costs are connected to the period in which the business income was earned by the taxpayer the costs may be deductible, but not by the spouse.

Reasons: Consistent with Tournier v. The Queen, 2018 TCC 229, future storage and maintenance costs incurred by a taxpayer for maintaining records after the cessation of the taxpayer’s business may be deductible where such costs represent the enduring and current provisions of the business activities beyond the period in which the income was received. However, such costs must be incurred by the taxpayer and not some other person as the business is that of the taxpayer.

XXXXXXXXXX					2021-088286
M. Sims

October 3, 2022

Dear XXXXXXXXXX:

Re: Deductibility of Storage Costs

We are writing in response to your email of February 27, 2021, and our telephone conversation (Sims/XXXXXXXXXX) of October 29, 2021, wherein you requested our views on whether rental and operating costs associated with the storage of medical records (the “Storage Costs”) would be deductible in computing the income of your spouse. We apologize for the delay in our response.

You indicated that you are a medical doctor who recently retired and that your associated professional corporation is no longer active. During your period of practice, a significant amount of medical records were created and, pursuant to the rules of the College of Physicians & Surgeons of Alberta (“CPSA”), such records are required to be maintained.

You note that you have appointed your wife as custodian of the medical records and that rental and operating expenses are being incurred in order to store them. You also note that a minor amount of income may be earned by your spouse in the form of administrative charges when transferring copies of the records, as required.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

The Canada Revenue Agency’s (“CRA”) general views on the deductibility of outlays and expenses are set out in Interpretation Bulletin IT-487, Archived – General Limitation on Deduction of Outlays or Expenses (“IT-487”). As per paragraph 1 of IT-487, “Paragraph 18(1)(a) provides a general restraint on the deductions permitted in the computation of income of a taxpayer from a business or property by prohibiting the deduction of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.” Whether the Storage Costs are incurred for the purposes of gaining or producing income from a business or property is a question of fact.

The Tax Court of Canada’s decision in Tournier v. The Queen, 2018 TCC 229 (“Tournier”) provides guidance on whether such costs would still be deductible after the cessation of a business.

In Tournier, the taxpayer was a lawyer who, over many years of practice, acquired files that gave rise to file storage fees that they continued to incur after the cessation of their practice. The question was whether the taxpayer, who has no current business income, was entitled to deduct the file storage fees as an expense in relation to client files created during previous tax years when they had business income.

In paragraph 10, the court stated that the taxpayer “was accruing annually “run off” responsibilities concerning file retention, accessibility and, ultimately, future storage obligations.” The court further stated in paragraph 12:

“Both the past accrual of future record keeping services, the file storage, and the need to protect presently her insurance coverage for past legal services all represent the enduring and current provision of legal services (“continuing services”) beyond the temporal period in which the income was received: the year in which it was otherwise earned and recorded. Put another way, the continuing services provided by Ms. Tournier in 2015 were referable and connected to the income earned in previous years. This is consistent with the notion of unavoidable expenses necessarily expended in future years referable to previous income contemplated in the cases of Poulin, Raegele and Langille.”

Therefore, generally speaking, the fact that the business is no longer carried on will not preclude the Storage Costs from being deductible in the year they are made or incurred, provided such costs are connected to the ordinary income earning activities of the business prior to its termination.

However, consideration must be given to the person that is incurring the costs. It is the CRA’s view that the business or property referred to in paragraph 18(1)(a) of the Act must be that of the taxpayer himself and not that of some other person. As such, while the Storage Costs themselves are not necessarily precluded from deductibility because of the termination of the business, the Storage Costs would likely not be deductible by your spouse, regardless of the nominal amount of income from administrative charges.

We trust these comments will be of assistance to you.

Sincerely,

Sandro D’Angelo, CPA, CMA
Acting Manager
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate