31 May 1995 Internal T.I. 9427267 - GOLF MEMBERSHIP

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether the losses from the leasing of a golf club membership should be disallowed.

Position TAKEN:

The losses should be disallowed under paragraph 18(1)(a) and (h) since there is no reasonable expectation of profit. The expenses could also be disallowed under paragraph 18(1)(l).

Reasons FOR POSITION TAKEN:

Published departmental positions and the use of the words "in respect of"

		May 31, 1995

	XXXXXXXXXX Tax Services Office		HEADQUARTERS
	Office Examination				B. Kerr
	Attention:  XXXXXXXXXX	957-8953

942726

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This is in reply to your request of October 12, 1994, for our comments concerning the annual rental losses claimed by the taxpayer in respect of her non-equity membership (the "Membership") in
XXXXXXXXXX

We apologize for the delay in our response.

Facts

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In regards to whether the taxpayer had a reasonable expectation of profit, they have stated: that the actual losses incurred were the result of the economy crashing in 1989, which had a major effect on business income, management salaries and net disposable income, resulting in a decline in the demand for rental of memberships; that gross revenue had increased each year and losses were declining each year; the investment was sold to terminate the continuance of rental losses; that the plans were adversely affected by the recession, beyond all reasonable expectations; time spent on the activity consisted of finding lessee's with the assistance of the taxpayer's spouse; the taxpayer occupies an executive position and holds a university degree and was quite capable of evaluating the feasibility of the investment to conclude the anticipation of a reasonable profit and that the operation was financially viable.

You have asked us whether you should disallow the losses on the basis of no reasonable expectation of profit, disallow the membership dues and fees under paragraph 18(1)(l) or allow the losses.

Our Comments

The determination of whether a taxpayer carries on an activity with a "reasonable expectation of profit" is a question of fact, which requires a review of all the facts and other information pertaining to a specific situation. Over the years, the courts have heard a considerable number of cases dealing with the concept of "reasonable expectation of profit", the most notable being Oscar Dorfman v. Minister of National Revenue, (72 DTC 6131), and William Moldowan v. Her Majesty the Queen, (77 DTC 5213). The provisions of paragraph 18(1)(h) and subsection 248(1) dealing with personal or living expenses, paragraph 18(1)(a) dealing with the deductibility of expenses, and sections 3 and 9 dealing with the concept of "source of income" are the most relevant provisions dealt with in such cases. Although, we are not aware of any cases involving golf courses, the provisions of paragraph 18(1)(l) have been referred to in cases involving "yachts". Although, a majority of the case law deals with farming operations, there are several cases dealing with losses from rental operations, losses incurred by visual artists and writers, and losses associated with taxpayer's personal interests.

Paragraph 18(1)(h) provides that "in computing the income of a taxpayer from a business or property no deduction shall be made in respect of personal and living expenses of the taxpayer...". The definition of "personal or living expenses" in subsection 248(1) includes "the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,...". Paragraph 18(1)(a) provides 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 by the taxpayer for the purpose of gaining or producing income from the business or property". In analyzing the kind of activity carried out by a taxpayer, the courts have concluded that the absence of a reasonable expectation of profit denies the existence of a source of income. If an activity is not a source of income, subsection 248(1) defining business, subsections 9(1) and (2) dealing with the calculation of income and loss from business or property, as well as paragraph 3(d) cannot apply to allow as a deduction from other income the losses sustained by a taxpayer.

In the Dorfman case, it was stated by Collier, J at page 6134:

"I cannot accept the interpretation put by council for the Minister in this case on the words "source of income": that there must be net income before there can be a source, in my view the words are used in the sense of a business, employment, or property from which a net profit might reasonably be expected to come".

In the Moldowan case, it was stated by Dickson, J at page 5215:

"Although originally disputed, it is now accepted that in order to have a "source of income" the taxpayer must have profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business....There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered:

the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking..."

In response to Question 75 of the 1984 Revenue Canada Round Table held at the Annual Conference of the Canadian Tax Foundation concerning the determination of a reasonable expectation of profit, the Department stated that it considers the following general criteria: profit and loss experience in past years; significance and growth of gross revenue; development of the operation to date; planned or intended course of action; time spent on the activity in question; education, background, and experience; and extent of activity in relation to that of business of a comparable size. These criteria are considered whenever we examine the following topical issues: rental operations, especially if the tenants are not dealing at arm's length with the landlord; yacht chartering operations; trailer rentals through an agent; and other operations flowing from, or associated with, a taxpayer's personal interests, hobby, and similar pursuits.

Depending on the nature of the activity, additional criteria may be relevant including the taxpayer's personal use of the property and the personal benefit enjoyed by the taxpayer because of the activity. For additional comments, reference may be made to IT-322 entitled "Farming losses", IT-504 entitled "Visual Artists and Writers", and Tax Analysis TA-7 entitled "Reasonable Expectation of Profit" of the Tax Research Manual.

The facts as determined from our review of the supporting documentation and as determined by you, versus those presented by the representative contain numerous discrepancies. For example, whether the Membership is an equity or non-equity membership, and whether it is allowable to purchase the Membership for investment purposes as opposed to personal use or benefit. In addition, we have not been provided with any of the incorporating documentation of the Corporation, including its by-laws and objects. However, it is our understanding, that most incorporated golf clubs are generally set up either as profit-making entities with share capital under the Canada Business Corporations Act or the applicable provincial Business Corporations Act or as non-profit entities without share capital under the Canada Corporations Act or a similar provincial Act. In the profit-making clubs, a return on investment may be expected in terms of annual corporate profits, annual distributions to the shareholders as dividends, and capital appreciation on their share. The interest of any shareholder in such clubs are commonly referred to as equity shares or equity memberships. On the other hand, the non-profit clubs are set up for recreational purposes or purposes other than profit and do not allow the distribution of its income to its members. The interest of any member in this type of club is commonly referred to as a non-equity membership. In addition, it is quite common for a profit-making club to also issue non-equity shares or memberships.

In our view, the Corporation appears to be a non-profit type club and the Membership appears to be a non-equity membership. In respect of a non-equity membership, the property generally gives you the right to acquire a golf playing privilege and access to the club. With regards to the ability to allow someone else to use your share or membership to obtain the right to play golf, this is usually done to accommodate such holders in unusual circumstances such as when someone temporarily relocates, wishes to take a year off from playing, or is experiencing temporary financial problems but does not wish to permanently dispose of their membership or share rights.

In this particular situation, based on the facts as determined by you, the documentation submitted by the taxpayer and as determined from our review of the application for membership, and considering all the relevant criteria outlined by the courts and the Department, it is our view that the taxpayer did not have a reasonable expectation of profit. Accordingly, the provisions of paragraph 18(1)(h), or (a) would apply to disallow the losses.

With respect to the application of paragraph 18(1)(l) to disallow the expenses, it is our view that the provisions of paragraph 18(1)(l) are broad enough to include not only the membership dues and fees, but also the interest expense. Paragraph 18(1)(l) provides 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...for the use or maintenance of a property that is a...golf course or facility, unless...made or incurred by the taxpayer in the ordinary course of the taxpayer's business of providing the property for hire or reward, or as membership fees or dues (whether initiation or otherwise) in any club the main purpose of which is to provide...recreational or sporting facilities...". Our view is based on the case of Gene A. Nowegijick v. Her Majesty the Queen, (83 DTC 5041) where at page 5045, Dickson, J stated:

"The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to", or "in connection with." The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters."

However, since in this particular situation the provisions of paragraph 18(1)(h) and (a) should be sufficient to disallow the losses, reliance on paragraph 18(1)(l) may not be necessary except as an alternative. Additional comments concerning paragraph 18(1)(l), including the offset of expenses, may be found in Interpretation Bulletin IT-148R2 entitled "Recreational Properties and Club Dues".

R. Albert
for Director
Business and General Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch