5 April 1994 Ministerial Letter 9406688 - EXEPENSES FOR USE OF LODGES

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.

DM'S OFFICE (2) ADM #940372
ADM'S OFFICE (3)

RETURN TO RULINGS, ROOM 303, MET. BLDG.

AUTHOR
SUBJECT OR CORPORATE FILE
April 5, 1994

MEMORANDUM FOR THE HONOURABLE DAVID ANDERSON

SUBJECT: Expenses incurred for use of a lodge

As requested in your note of March 7, 1994, I am writing to brief you in regard to the restriction on the deductibility of expenses incurred for use of a lodge.

ISSUE

Subparagraph 18(1)(l)(i) of the Income Tax Act denies a deduction for outlays or expenses made or incurred by a taxpayer for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility.

You indicated that the owners of resorts that operate fishing lodges have raised concerns recently with respect to business expense entertainment allowances.

BACKGROUND

The tax policy underlying the restriction of expenses incurred at 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 only be marginal.

The issue has been considered most recently in the courts in the case of Her Majesty The Queen v. Sie-Mac Pipeline Contractors Ltd. (92 DTC 6461; (1992) 1 CTC 341). In that case, the Federal Court of Appeal upheld the Crown's view that the corporate taxpayer's expenses of hosting some of its customers at a fishing lodge should be denied under subparagraph 18(1)(l)(i) of the Act. The court noted that there is an anomaly which permits deductions for entertainment of customers in restaurants or hotels, but not on yachts or in lodges. However, it concluded that it was within the authority of Parliament to make such distinction even though some may view the distinction as unfair.

At the 1984 Canadian Tax Foundation Annual Conference, we announced that not all business activities of a taxpayer at a lodge are subject to the restriction. We stated that where a resort property is used for genuine business purposes, which purposes do not include the entertainment or recreation of clients, suppliers, shareholders or employees, we do not consider that the related expenses are caught by the provision. Thus, in a specific case, it is a question of fact whether the expenses incurred for the use of a lodge are within the scope of subparagraph 18(1)(l)(i). At the 1993 Canadian Tax Foundation we confirmed this position, however, we stated that the Department was reviewing its position in light of Sie-Mac.

Position

We have concluded our review and it is our position that expenses incurred at a resort hotel or lodge are presumed to be non-deductible unless the facts establish that they were laid out for genuine business purposes, which purposes do not include the entertainment or recreation of clients, suppliers, shareholders or employees.

Following this position will allow the deduction of expenses for genuine business meetings held in resort hotels, as is often the case. It is unlikely, however, that expenses for meetings at hunting and fishing lodges will meet such a test.

			Pierre Gravelle

Bill Kerr
957-2139
March 31, 1994
940668