Citation: 2011TCC395
Date: 20110831
Docket: 2011-144(IT)I
BETWEEN:
PINK ELEPHANT INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
The issue in these
appeals is whether the Appellant is entitled to deduct the full amount that it
incurred for catering expenses in determining its income for 2006 and 2007 for
the purposes of the Income Tax Act (the “Act”) or whether such
expenditures were subject to the limitation provided in subsection 67.1(1) of
the Act. In particular the issue is whether the exception provided in
paragraph 67.1(2)(a) of the Act was applicable. The amounts
of catering expenses that were denied as a deduction in computing income as a
result of the Respondent applying the limitation provided in subsection 67.1(1)
of the Act were $33,750 for 2006 and $41,275 for 2007.
[2]
The Appellant carries on
a business of providing information technology training. The Appellant provides
public educational courses in various cities to individuals. If a particular
company has more than six individuals who would be taking the course, the
Appellant will alternatively provide private training at the company’s
facilities. The public educational courses are provided at a hotel and
breakfast and lunch are provided to the participants. No meals are provided if
the courses are held at a client’s facilities. The fee to attend a public course
ranges from approximately $2,000 to approximately $10,000, depending on the
course. The invoice and the receipt issued for a particular course only
indicate the total cost to the participant for the course. The participants are
not billed separately for the meals nor are the amounts for the meals
identified separately in the invoice or the receipt for the course.
[3]
The Appellant claimed a
deduction for the full amount incurred as catering expenses in providing the
meals to the participants in 2006 and 2007 and the Canada Revenue Agency
applied the limitation provided in subsection 67.1(1) of the Act to a
portion of the catering expenses in each of these two years. The portion to
which this limitation was applied was $67,500 for 2006 and $82,550 for 2007. As
a result the Canada Revenue Agency denied catering expenses in the amount of
$33,750 for 2006 and $41,275 for 2007.
[4]
Subsection 67.1(1) and
paragraph 67.1(2)(a) of the Act provided in 2006 and 2007 as follows:
67.1 (1) For the purposes of this Act, other than sections 62, 63,
118.01 and 118.2, an amount paid or payable in respect of the human consumption
of food or beverages or the enjoyment of entertainment is deemed to be 50% of
the lesser of
(a) the amount actually paid or payable in respect thereof,
and
(b) an amount in respect thereof that would be reasonable in
the circumstances.
…
67.1 (2) Subsection (1) does not apply to an amount paid or payable
by a person in respect of the consumption of food or beverages or the enjoyment
of entertainment where the amount
(a) is paid or payable for food, beverages or entertainment
provided for, or in expectation of, compensation in the ordinary course of a
business carried on by that person of providing the food, beverages or
entertainment for compensation;
[5]
Counsel for the
Appellant acknowledged that, if the exceptions contained in subsection 67.1(2)
of the Act were not part of the Act, the limitation in subsection 67.1(1)
of the Act would be applicable to the catering expenses claimed by the
Appellant. The issue in this appeal is whether the exception contained in
paragraph 67.1(2)(a) of the Act is applicable to the catering
expenses incurred by the Appellant.
[6]
The Supreme Court of Canada in The
Queen v. Canada Trustco Mortgage Company, 2005 SCC 54, 2005 DTC 5523
(Eng.), [2005] 5 C.T.C. 215, 340 N.R. 1, 259 D.L.R. (4th) 193, [2005]
2 S.C.R. 601, stated that:
10 It has been long established as a matter of statutory
interpretation that “the words of an Act are to be read in their entire context
and in their grammatical and ordinary sense harmoniously with the scheme of the
Act, the object of the Act, and the intention of Parliament”: see 65302
British Columbia Ltd. v. R., [1999] 3 S.C.R. 804 (S.C.C.), at para. 50. The
interpretation of a statutory provision must be made according to a textual,
contextual and purposive analysis to find a meaning that is harmonious with the
Act as a whole. When the words of a provision are precise and unequivocal, the
ordinary meaning of the words play a dominant role in the interpretive process.
On the other hand, where the words can support more than one reasonable
meaning, the ordinary meaning of the words plays a lesser role. The relative
effects of ordinary meaning, context and purpose on the interpretive process
may vary, but in all cases the court must seek to read the provisions of an Act
as a harmonious whole.
[7]
In The Queen v. Stapley,
2006 FCA 36, 2006 DTC 6075, 345 N.R. 320, [2006] 3 C.T.C. 188, Justice Sexton,
writing on behalf of the Federal Court of Appeal, stated that:
c) The Mischief Sought to be Cured by the Provision
22 Subsection 67.1(1) is a rule that applies to the
calculation of income. A taxpayer must include in income, income from a
business. Income from a business is defined as the profit from a business. ITA,
subs. 9(1). In calculating the profit from a business, a taxpayer cannot deduct
personal or living expenses. ITA, para. 18(1)(h). However, a taxpayer may
deduct reasonable expenses made for the purpose of producing income from a
business. ITA, para. 18(1)(a). Subsection 67.1(1) limits the quantum of
paragraph 18(1)(a) deductions with respect to food, beverage and entertainment expenses.
23 Logic suggests that subsection 67.1(1) fulfills the
following function in the legislative scheme. To reduce the amount of tax
owing, a taxpayer will seek to minimize the value of income. One way to do so
involves enlarging the size of paragraph 18(1)(a) deductions. Thus, the
taxpayer may blend personal and business expenses and attempt to deduct them
both as business expenses under paragraph 18(1)(a). For instance, a taxpayer
might characterize the cost of a dinner eaten with a client as a wholly-deductible,
paragraph 18(1)(a) business expense as opposed to a non-deductible, paragraph
18(1)(h) personal one. Recognizing this, subsection 67.1(1) arbitrarily
apportions this kind of “dual-purpose” expense at fifty percent between
income-earning and personal expenses.
[8]
It seems to me that in
interpreting the exception in paragraph 67.1(2)(a) of the Act,
the reason why the limitation in section 67.1 of the Act was added to
the Act should be taken into account. The provision of meals by any
person, as part of the ordinary course of business of that person, for
compensation (whether the provision of meals is a minor part of that business
or a significant part of that business) is not the mischief identified by the
Federal Court of Appeal.
[9]
The limitation on the
amount that may be claimed as an expense for food and beverages does not apply
if the food and beverages are provided for compensation (or in expectation of
compensation) in the ordinary course of business of providing the food and
beverages for compensation. Counsel for the Respondent acknowledged that the
exception would not just apply to a person whose only business activity was
providing meals for compensation. I agree with this statement. Otherwise a
person who operated a hotel and a restaurant would be subject to the limitation
in relation to the amounts paid for food and beverages that would be served in
the restaurant. It does not seem to me that a person who operated a hotel and a
restaurant would be subject to the limitation on the amount expended for food
and beverages but a person who only operated a restaurant would not be subject
to the limitation.
[10]
The exception in
paragraph 67.1(2)(a) of the Act will apply to amounts expended by
a particular person on food or beverages if the person, in the ordinary course
of business of providing food and beverages for compensation, provides such
food and beverages for compensation (or the expectation of compensation). It
seems to me that such food or beverages will be provided in the ordinary course
of business of providing food and beverages whether the provision of food or beverages
is a minor or a significant part of the ordinary course of business of that
person. For example, as acknowledged by the Canada Revenue Agency in paragraph
5 of Interpretation Bulletin IT-518R, an airline that provides meals to its
customers would not be subject to the limitation on its expenditures for food
and beverages. It seems obvious that the provision of food and beverages would
be a minor part of the business being carried on by an airline. Counsel for the
Respondent argued that the limitation in section 67.1 of the Act did not
apply to airlines as a result of the provisions of subsection 67.1(4) of the Act.
This subsection provides that:
(4) For the purposes of this section,
(a) no amount paid or payable for travel on an airplane,
train or bus shall be considered to be in respect of food, beverages or
entertainment consumed or enjoyed while travelling thereon; and
(b) “entertainment” includes amusement and recreation.
[11]
The amount paid by the
airline for the food and beverages it serves to its customers would not be an
amount paid for travel on an airplane. Subsection 67.1(4) of the Act would
apply to the passengers and as a result of this provision airline passengers
(who are allowed deduct the cost of airfare in determining their income for the
purposes of the Act) do not need to allocate a portion of the airfare to
the food and beverages that they are served. This provision does not apply to the
airline itself which has incurred an amount for the food and beverages that are
provided to its passengers. The exemption that the airline would need to rely
upon to deduct the full amount expended for such food and beverages is the
exemption in paragraph 67.1(2)(a) of the Act.
[12]
The educational courses
would range from two day courses to courses that would last for thirteen days.
At the public educational courses (which were presented at a hotel) breakfast
and lunch were provided. In the promotional materials that were prepared it was
indicated that breakfast and lunch would be provided. The Appellant held
approximately 35 public educational courses in 2006 and approximately 43 in
2007. In 2006 the revenue from the public education courses was approximately
30% of the total revenue of the Appellant and in 2007 it was approximately 38%
of the total revenue of the Appellant. It seems clear that the ordinary course
of business of the Appellant included the provision of public educational courses
and that the provision of public educational courses included the provision of
breakfast and lunch to the participants. Since the participants each paid from
$2,000 to $10,000 to attend the public education courses, these courses were
clearly provided for compensation and since the meals were part of the package,
the meals were also provided for compensation.
[13]
Counsel for the
Respondent argued that since the Appellant did not separately identify the
amount that the participants were paying for the meals that the meals were not
provided for compensation. The Appellant also did not identify the amount that
the participants were paying for the exam that was given to the participant or
the amount that the participants were paying for the course materials or the
amount they were paying for the lectures themselves. Not identifying each item
that is provided as part of a package does not mean that any particular item is
not being provided for compensation. It simply means that a reasonable
allocation must be made, if necessary, to determine the amount paid for any
particular item that is part of the package. If a person acquires land and
building for a single price, it does not mean that either the land or the
building was acquired for no compensation.
[14]
Counsel for the
Respondent also argued that since some participants were registering for
educational courses before a location was determined, that the meals were not
provided for compensation. However, it seems to me that it was clear that meals
were to be provided at the public courses, wherever these courses were to be
held. Not having a location when a participant first registered for a course
does not change the fact that meals were to be provided at the course (wherever
it would be held). Each participant paid from $2,000 to $10,000 to attend the
course, which included breakfast and lunch for each day of the course, and
therefore the meals were provided for compensation.
[15]
The Appellant had also raised the
issue of the limitation on amounts in dispute in an appeal under the Informal
Procedure. Section 2.1, subsection 18(1) and section 18.1 of the Tax Court
of Canada Act provide as follows:
2.1 For the purposes of this Act, "the
aggregate of all amounts" means the total of all amounts assessed or
determined by the Minister of National Revenue under the Income Tax Act,
but does not include any amount of interest or any amount of loss determined by
that Minister.
…
18. (1) The
provisions of sections 18.1 to 18.28 apply in respect of appeals under the Income
Tax Act where a taxpayer has so elected in the taxpayer’s notice of appeal
or at such later time as may be provided in the rules of Court, and
(a) the aggregate of
all amounts in issue is equal to or less than $12,000; or
(b) the amount of the
loss that is determined under subsection 152(1.1) of that Act and that is in
issue is equal to or less than $24,000.
…
18.1
Every judgment that allows an
appeal referred to in subsection 18(1) shall be deemed to include a statement
that the aggregate of all amounts in issue not be reduced by more than $12,000
or that the amount of the loss in issue not be increased by more than $24,000,
as the case may be.
[16]
Counsel for the Appellant stated
that the amount of income tax reassessed under the Act for 2006 that was
in issue was less than $12,000 and that the amount of income tax reassessed
under the Act for 2007 that was in issue was less than $12,000 but the
aggregate total for both years that was in issue was more than $12,000. No
penalties were assessed under the Act.
[17]
In Maier v. The
Queen, [1994] T.C.J. No. 1260,
Justice Garon (as he then was) held that the aggregate of all amounts in
dispute means the aggregate amounts in dispute under a particular assessment
(or reassessment) and not under a Notice of Appeal. When a Notice of Appeal
relates to more than one assessment (or reassessment) the issue is not whether
the total amounts in dispute under the Notice of Appeal exceed $12,000 but
whether the total amounts in issue in relation to any particular assessment or
reassessment exceeds $12,000. Therefore, the limitation of $12,000, if
applicable, will apply to each assessment (or reassessment) that is the subject
of the appeal. In this case, since the amount of taxes reassessed under the Act
for each reassessment that is in issue (as there was one reassessment for 2006
and a separate reassessment for 2007) is less than $12,000, the limitation will
not apply.
[18]
As a result the Appellant’s appeals in relation to the reassessment
of its 2006 and 2007 taxation years are allowed and the matter is referred back
to the Minister of National Revenue for reconsideration and reassessment on the
basis that the Appellant is entitled to the deductions claimed by the Appellant
for catering expenses in 2006 and 2007 as the exception in paragraph 67.1(2)(a)
of the Act is applicable to these expenses. The Appellant is therefore
entitled to deduct the amount of $33,750 that was denied as a deduction in
computing its income for 2006 and the amount of $41,275 that was denied as a
deduction in computing its income for 2007.
[19]
The Appellant is entitled to costs
which are fixed in the amount of $2,500.
Signed at Halifax, Nova Scotia, this 31st day of August, 2011.
“Wyman W. Webb”
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