21 November 1990 Internal T.I. 902927 F - Advertising or Promotional Costs - Yacht to Entertain Clients Extended

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.

19(1)

November 21, 1990

Dear Sirs:

Re:  "Subparagraph 18(1)(1)(i) of the Income Tax Act (the "Act")

This is in reply to your letter of October 16, 1990, requesting our interpretation of certain specific issues concerning subparagraph 18(1)(1)(i) of the Act.

In a situation where a yacht is used primarily by the taxpayer to entertain clients, you question whether or not the interest expense on funds borrowed in order to purchase a yacht is subject to the restrictions in subparagraph 18(1)(1)(1) of the Act. It is your view that the phrase "use or maintenance" tends to suggest operating-type costs rather than expenses on account of capital such as interest or capital cost allowance.

In a sponsorship type situation, you also question whether advertising or promotional costs are subject to the restrictions in subparagraph 18(1)(1)(i) of the Act. In the hypothetical situation you describe taxpayer A enters into a contract with taxpayer B, who owns the yacht. A agrees to pay a sum of money (fair market value for the advertising exposure received) to B (who "uses" the yacht) if B prominently displays A's corporate logo on the yacht during the racing season.

Our Comments

The Courts have described interest as "the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another". Eligibility for the deduction is contingent on the use of the borrowed funds. it is our view that the interest expense respecting the purchase of a yacht which is used primarily to entertain clients, suppliers, shareholders or employees is restricted by the application of subparagraph 18(1)(1)(i) of the Act. The deduction of capital cost allowance in respect of such a vessel is prohibited by Income Tax Regulation 1102(1)(f).

In answer to your second question, all business expenditures have to meet the test that they were made or incurred for the purpose of gaining or producing income from the business. If the business of A can support a case that it expected to enhance, improve or maintain its income by incurring the advertising or promotional expense, then the costs incurred by A to have B display its corporate logo during the racing season will be allowable, provided, of course, such costs are reasonable in the circumstances. We note that if, in addition to advertising expense, the fee paid by A to B included the entertainment or recreation of clients, suppliers, shareholders or, employees of A aboard B's yacht, it our view that paragraph 18(1)(1) of the Act would have application.

We trust our comments will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch