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 cost of a licence attached to season tickets of a professional sports team is an eligible capital expenditure and subject to the 67.1 limit on entertainment expenses.
Position TAKEN:
It is a question of fact whether the licence is an eligible capital expenditure and it would be subject to the 67.1 limit.
Reasons FOR POSITION TAKEN:
subsection 14(5) meaning of "eligible capital expenditure", the department's published view of "entertainment" and the use of the words "in respect of" in section 67.1.
943370
XXXXXXXXXX B. Kerr
Attention: XXXXXXXXXX
May 30, 1995
Dear Madam:
Re: Treatment of Licence Fee for Season Tickets
This is in reply to your letter of December 20, 1994, wherein you requested our views on whether the cost of an optional licence fee sold as part of the season ticket package of a professional sports team would qualify as an eligible capital expenditure and is subject to the 50% limitation on entertainment expenses. The licence is not for a limited period and the rights and privileges attached thereto include the right to transfer and a discount on the price of season tickets.
The situation described in your letter involves actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation. However, we can offer the following general comments.
It is a question of fact whether the cost of a licence would qualify as an eligible capital expenditure. Subsection 14(5) of the Income Tax Act (the "Act") defines "eligible capital expenditure" of a taxpayer in respect of a business to mean:
"the portion of any outlay or expense made or incurred by the taxpayer, as a result of a transaction occurring after 1971, on account of capital for the purpose of gaining or producing income from the business, other than any such outlay or expense
(a) in respect of which any amount is or would be, but for any provision of this Act limiting the quantum of any deduction, deductible (otherwise than under paragraph 20(1)(b)) in computing the taxpayer's income from the business, or in respect of which any amount is, by virtue of any provision of this Act other than paragraph 18(1)(b), not deductible in computing that income,
(b) made or incurred for the purpose of gaining or producing income that is exempt income, or
(c) that is the cost of, or any part of the cost of,
(i) tangible property of the taxpayer,
(ii) intangible property that is depreciable property of the taxpayer,
(iii) property in respect of which any deduction (otherwise than under paragraph 20(1)(b)) is permitted in computing the taxpayer's income from the business or would be so permitted if the taxpayer's income from the business were sufficient for the purpose, or
(iv) an interest in, or right to acquire, any property described in any of subparagraphs (i) to (iii)
..."
As stated in paragraph 11 of Interpretation Bulletin IT-143R2, "Meaning of eligible capital expenditure", an outlay or expense made or incurred to acquire a patent, franchise, concession, or licence for use in a business qualifies as an eligible capital expenditure provided that the outlay or expense did not result in the acquisition of a depreciable property of class 14 of Schedule II of the Income Tax Regulations or a property that is described as an exception in paragraphs (a), (b), (c) or (d) of class 14. Paragraph 11 of Interpretation Bulletin IT-477 states that "the words "franchise, concession or licence" are not capable of easy definition. Generally, they must be given the meaning or sense in which they are normally employed by businessmen on this continent and they extend, not only to certain kinds of rights, privileges or monopolies conferred by or pursuant to legislation or by governmental authority, but also to analogous rights, privileges or authorities created by contract between private parties." The tax treatment for each person acquiring a licence would have to be determined based on their particular situation.
With respect to entertainment expenses, Interpretation Bulletin IT-518, "Food, Beverages and Entertainment Expenses", states that a reasonable amount paid or payable for food, beverages or entertainment incurred in earning income from a business, property and in certain circumstances, an office or employment is normally deductible in computing a taxpayer's income. However, this amount is subject to the limit provided in section 67.1 of the Act. Paragraph 1 of IT-518 states that the limitation will apply equally whether the amounts are otherwise deductible as expenses, capitalized, or included in the cost of inventory, scientific research and experimental development expenditures, exploration and development expenses, etc. Paragraph 6 of IT-518 states that entertainment will include the cost of tickets for an athletic event. In addition subsection 67.1(1) states:
"...an amount paid or payable in respect of...the enjoyment of entertainment..."
In the case of Gene A. Nowegijick v. Her Majesty the Queen, (83 DTC 5041) 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."
Accordingly, in our view the licence would also be subject to the limitation provided in section 67.1 of the Act.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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