10 November 1997 External T.I. 9725655 - GOLF-RELATED 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.

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.

		972565
XXXXXXXXXX	B. Kerr

Attention: XXXXXXXXXX

November 10, 1997

Dear Sir:

Re: Interpretation Bulletin IT-148R3
Recreational Properties and Club Dues

This is in response to your letter of September 16, 1997, expressing concerns in respect of the Department's position regarding the deductibility of entertainment expenses at a golf club, as outlined in Interpretation Bulletin IT-148R3. In your view, entertainment expenses at golf clubs are legitimate business expenses and should be deductible.

Our Comments

The Income Tax Act (the "Act") provides several restrictions with respect to the deductibility of expenses in computing income from a business. One of those restrictions is found in paragraph 18(1)(l) of the Act which concerns the deductibility of expenses in respect of certain recreational properties and club dues. This provision specifically provides that, in computing income from a business, a taxpayer cannot deduct outlays or expenses for the use or maintenance of a property that is a yacht, camp, lodge or golf course or facility, unless they were incurred in the ordinary course of a taxpayer's business of providing the property for hire or reward. The word "facility" extends the words "golf course" to include any amenities provided by a golf club, such as a restaurant, dining room, lounge, banquet hall, conference room, health club, swimming pool, curling rink or tennis courts. Unlike golf-related expenses, the deductibility of expenses related to other forms of entertainment, such as basketball or baseball games, is not specifically addressed in the Act. Paragraph 18(1)(l) of the Act also provides that membership fees or dues in any club cannot be deducted if the main purpose of the club is to provide its members with dining, recreational, or sporting facilities.

The tax policy underlying the restriction of entertainment expenses incurred at golf and resort facilities relates to the recreational nature of such expenditures and the fact that the direct business purpose of the use of such facilities may be marginal. The 1969 Benson Report, which contained proposals for the tax reform of 1972, called for an end to the deductibility of all entertainment expenses, regardless of whether such expenses were incurred for genuine business purposes. After consultations, the government of the day agreed that, as a compromise, entertainment expenses would remain deductible with certain exceptions. Expenditures incurred at golf facilities reflect one of those exceptions.

The Department's position regarding meals and beverages at a golf club is supported by the 1993 Supreme Court of Canada decision in Sie-Mac Pipeline Contractors Ltd. v. R., 93 DTC 5158, wherein the court upheld the Federal Court of Appeal's decision that all of the taxpayer's expenses of entertaining customers at a fishing lodge were not deductible pursuant to paragraph 18(1)(l) of the Act. In the court's view, expenditures, such as food and transportation, incurred at or to the fishing lodge were not deductible, since the deduction of such expenses was "the very kind of thing the subparagraph was meant to stop".

Therefore, green fees or membership fees in a golf club are not deductible. In addition, expenses incurred for food and beverages at, and for the use of, a restaurant, dining room, lounge, banquet hall or conference room of a golf club are not deductible where the food and beverages or the use of the facilities are provided as part of a recreational activity at the golf club. However, the Supreme Court decision does not apply where the restaurant, dining room, lounge, banquet hall or conference room of a golf club is not used in conjunction with the recreational activities at the golf club but is used solely for business purposes, in the same fashion as a dining or meeting facility not situated on a golf course might be used. Such expenses would be deductible, but subject to the restriction which limits the deduction of entertainment expenses to 50% of the amount of the expense.

Although the Department recently issued a revised interpretation bulletin (IT-148R3) regarding recreational properties and club dues, as paragraph 18(1)(l) has been present in the Act since 1972, the revision of the bulletin is not due to a change in the law or in the Department's interpretation of the law as regards entertainment expenses at golf clubs. As indicated at the end of the Bulletin under "Explanation for Changes", the revisions to the Bulletin were intended to clarify the Department's interpretation.

As it appears from your letter that your members have, for the past 25 years, been proceeding under the false assumption that golf-related expenses are and always have been deductible, you may wish to inform them of the Department's position as set out above.

We trust that these comments have clarified the Department's position regarding entertainment expenses at golf clubs.

Yours truly,

Bryan W. Dath
Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch