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 license for an executive suite at a sports facility is deductible for tax purposes in 4 different scenarios: (i) The licensee entertains clients at all events (i.e., concerts, hockey games, etc.) available at the sports facility. (ii) The licensee entertains clients at only 3/4 of the events available at the sports facility. The remainder of the events are attended by the employees of the specific organization for reward and recognition purposes. (iii) The licensee obtains the use of an executive suite at the sports facility for the sole benefit of their employees for reward and recognition purposes. (iv) The licensee entertains clients only 3/4 of the time at the executive suite. The remainder of the time, the executive suite is used as a meeting room (or additional office space) for business purposes.
Position: In general terms, a license for a limited period qualifies as a class 14 asset and hence its cost should be apportioned over the life of the license. Further, such cost is restricted to 50% of the CCA otherwise determined by virtue of 67.1(1). An exception occurs, however, where the executive suite is used to entertain employees such that the employees are in receipt of a taxable benefit. In this case the 50% restriction does not apply owing to the exception in subsection 67.1(2). As regards the use of an executive suite as a meeting room, we are of the view that not much of the cost of the executive suite can be attributed to such a use.
Reasons: A license is included in the definition of “class 14.” The cost of a private box at a sports facility is considered entertainment.
XXXXXXXXXX J. Gibbons
5-982358
Attention: XXXXXXXXXX
December 21, 1998
Dear XXXXXXXXXX:
We are replying to your letter of August 20, 1998, in which you enquire about the deductibility of the licensing cost of an executive suite at a sports facility. In your letter, you describe four different scenarios, which involve the use of an executive suite at a sports facility to entertain clients, to recognize or reward employees, or as a meeting room or office suite.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only.
According to your letter, the licensing cost includes tickets for admission to all public events held at the sports facility, parking outside the arena, rent for the furniture and equipment in the executive suite, and other services such as security personnel. You also state that the licensee will not earn exempt income and that the fees under the license will be payable on an annual basis. On the basis that this fee is a deductible business expense and the amounts are reasonable, you have asked us to comment on the following four scenarios and your analysis.
Scenario 1
The licensee entertains clients at all events (i.e., concerts, hockey games, etc.) available at the sports facility.
Your analysis
The entire amount of the annual license fee would be deductible, subject to the 50% limitation in subsection 67.1(1) of the Act, as an entertainment expense.
Scenario 2
The licensee entertains clients at only 3/4 of the events available at the sports facility. The remainder of the events are attended by the employees of the specific organization for reward and recognition purposes.
Your analysis
The portion of the licensing fee relating to the entertainment of clients would be deductible, subject to the 50% limitation, as an entertainment expense. The portion relating to client entertainment would have to be determined on a reasonable basis. For example, the license fee could be apportioned using the number of events during the year at which clients were entertained versus the number of events that were attended by employees or, alternatively, it could be apportioned using the number of days the suite was available for business-use versus the number of days it was available to the employees.
Scenario 3
The licensee obtains the use of an executive suite at the sports facility for the sole benefit of their employees for reward and recognition purposes.
Your analysis
The cost of the license fee would be 100% deductible to the licensee, but would be remuneration to the employees (based on paragraph 67.1(2)(d)).
Scenario 4
The licensee entertains clients only 3/4 of the time at the executive suite. The remainder of the time, the executive suite is used as a meeting room (or additional office space) for business purposes.
Your analysis
The portion of the license fee relating to the entertainment of clients would be deductible, subject to the 50% limitation, as an entertainment expense. The portion of the license fee attributable to the executive’s suite use as a meeting room or additional office space would be 100% deductible (based on paragraph 67.1(2)(d)).
Our views
We are of the view that a license which is acquired for the purpose of gaining or producing non-exempt income would ordinarily be considered a class 14 depreciable property. An exception occurs, however, where a license is not for a limited period. In this case the license would likely qualify as an “eligible capital expenditure” instead. As stated in paragraph 15 of IT-477, “Capital Cost Allowance - Patents, Franchises, Concessions and License,” renewal or extension provisions that are automatic or within the control of the taxpayer in that they do not require any further negotiation with, or the concurrence or consent of, the grantor, should be included in the life of the property. Where the number of such renewals or extensions is indefinite, the property would not qualify as a class 14 property since it would not be for a limited period. Our comments below are based on the presumption that the license for the executive suite is in fact for a limited period and is thus a class 14 depreciable property.
Pursuant to paragraph 1100(1)(c) of the Income Tax Regulations, the cost of the license should be apportioned over the life of the license. Further, our view, as stated in paragraph 4 of IT-477, is that this apportionment, i.e., capital cost allowance (CCA), should be on an equal, per diem, basis. For example, if a license is purchased on the last day of a taxpayer’s taxation year, only 1/365 of the annual apportionment would be deductible in that year.
As indicated in Interpretation Bulletin IT-518R, “Food, Beverages and Entertainment Expense,” the cost of a private box at a sports facility is considered an entertainment expense. Accordingly, unless one of the exceptions in subsection 67.1(2) applies, subsection 67.1(1) restricts the deduction in respect of CCA for an executive suite license at a sports facility to 50% of the amount otherwise determined. In our view, the exception in paragraph 67.1(2)(d) would likely apply to scenarios 2 and 3 where the employer uses the executive suite partly or wholly to reward or recognize employees. In these situations, we would consider employees who have been given tickets to attend events at the sports facility using the executive suite to have received a taxable benefit, the value of which would be included in the employees’ income.
In scenario 2, you suggest two methods for allocating the cost of the facility between the different purposes. We agree that an appropriate apportionment would be necessary in situations involving multiple uses of the executive suite, i.e., for entertaining clients, rewarding employees, or holding meetings. On the other hand, even if the executive suite can in fact be used as a meeting room or additional office suite, it is likely very difficult to justify any apportionment of the cost of an executive suite to its function as a meeting room or additional office suite since the reason for owning such property is usually the enjoyment of entertainment.
We trust that these comments will be of assistance.
Yours truly,
J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
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