5 January 2004 External T.I. 2003-0029025 - INTEREST PAID ON MEMBERSHIP IN GOLF CLUB

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Whether interest paid or payable by an individual on an amount payable for a membership in a golf club ("Membership") will be deductible in computing income?

Position TAKEN: No.

Reasons FOR POSITION TAKEN:

Where there is no income from a source that is a business or property

Where there is no income from a source that is a business or property, paragraph 18(1)(a) would apply to disallow any expense incurred by an individual in acquiring the Membership. Additionally, paragraph 18(1)(b) and subparagraph 20(1)(c)(ii) could apply to disallow the interest expense incurred in respect of the Membership.

Where there is income from a source that is a business or property

Paragraph 18(1)(l) would disallow any expense paid as membership fees or dues. The provisions of paragraph 18(1)(l) are broad enough to include not only the membership dues and fees, but also the interest expense (see file # 9427267).

XXXXXXXXXX 					2003-002902
P. Diguer, CGA
January 5, 2004 

Dear XXXXXXXXXX:

Re: Interest expense - Golf club membership

We are writing in response to your letter dated June 02, 2003 in which you request our views in regard to the deductibility of interest paid or payable on an amount payable for a membership in a golf club.

In particular, you describe a situation where an individual (the "Individual") purchased a membership (the "Membership") in a particular golf club (the "Golf Club") which is evidenced by a membership certificate issued by the Golf Club. The Membership was acquired, in large part, with financing obtained by way of a promissory note (the "Note"), issued on commercial terms and secured by a pledge of the Membership. In addition to the amount paid for the Membership, there is an annual fee which entitles the purchaser to golf games at the club.

The Membership has increased in value since its acquisition by the Individual. The Membership is transferable, subject to the prior approval by the Golf Club, and as such may be sold to other individuals, possibly for a profit.

You enclosed with your letter a copy of the membership application ("Membership Purchase Agreement") as well as a copy of the Note.

The Membership Purchase Agreement states, inter alia, as follows:

At page 1

... XXXXXXXXXX , [is] a non-profit corporation incorporated pursuant to the Corporations Act, XXXXXXXXXX ...

and at page 2

The Applicant hereby declares, represents and warrants that:

...

c) the applicant is aware that XXXXXXXXXX is organized exclusively for recreational purposes and shall be carried on without the purpose of gain for its members and that any profits or other accretions to XXXXXXXXXX shall be used in promoting its objects.

You ask

Whether the interest paid on the Note is deductible?

Additionally, you indicate, "... if this deduction is granted [interest expense on the Note], when the membership is sold there could be capital gains claimed on the sale."

Our comments

The situation that is described in your letter involves a series of actual completed transactions involving a specific taxpayer. 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 IC-70-6R5 dated May 17, 2002. Where the particular transaction is completed, the inquiry should be addressed to the relevant Tax Services Office. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which we hope are of assistance to you. However, written opinions are not advance tax rulings and, accordingly not binding on the Agency.

It is not evident from your request whether the Individual has income from a business or property. Additionally, we have not been provided with certain essential information relating to the Golf Club including for example, its by-laws and objects. As such, our comments briefly set out the Canada Customs and Revenue Agency's ("CCRA") views on the appropriate treatment of the interest expense paid or payable by an individual on a promissory note issued on commercial terms in circumstances where the individual:

? has no income from a source that is a business or property;

? has income from a source that is a business or property.

Membership in a golf club

Incorporated golf clubs

It is our understanding that most incorporated golf clubs are generally set up either as profit-making entities with share capital under the Canada Business Corporations Act or the applicable provincial Business Corporations Act or as non-profit entities without share capital under the Canada Corporations Act or a similar provincial Act.

In a situation involving a profit-making golf club, a return on investment may be expected in terms of annual corporate profits, annual distributions to the shareholders as dividends, and capital appreciation on their shares. The interest of any shareholder in such a golf club is commonly referred to as an equity share or equity membership. On the other hand, a non-profit golf club is set up for recreational purposes or purposes other than profit and does not permit the distribution of its income to its members. The interest of any member in this type of golf club is commonly referred to as a non-equity membership. In addition, it is quite common for a profit-making golf club to also issue non-equity shares or memberships.

With respect to the present case, the Golf Club appears to be a non-profit organization and the Membership appears to be a non-equity membership. In this regard we refer to the Membership Purchase Agreement and in particular the specific provisions mentioned above. Moreover, it is our understanding, as evidenced by the Membership Purchase Agreement that the Membership was purchased by the Individual on his or her own account and not for the benefit of any other person and that he or she was aware that the Golf Club was organized exclusively for recreational purposes without any purpose of gain such that the Golf Club is not a business carried on for profit.

Tax treatment of membership in golf club

Where there is no income from a source that is a business or property

The Income Tax Act (Canada) (the "Act") provides several restrictions and limits on the deductibility of outlays and expenses in computing income from a business or property. In this regard, generally, no deduction may be made in respect of outlays and expenses except to the extent that they were made or incurred by a taxpayer for the purpose of gaining or producing income from a business or property [paragraph 18(1)(a)], are reasonable in the circumstances [section 67], and are not personal or living expenses [paragraph 18(1)(h)].

Additionally, the Act provides restrictions and limitations on the deductibility of certain expenses that are reasonable, are not personal or living expenses and were made or incurred by a taxpayer for the purpose of gaining or producing income from a business or property, for example paragraphs 18(1)(c), 18(1)(l) and subsection 18(9).

Paragraphs 18(1)(a) and 18(1)(b)

Paragraph 18(1)(a) provides that in computing the income of a taxpayer from a business or property no deduction shall be made in respect of:

an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

Accordingly, it is our view that paragraph 18(1)(a) would generally apply to disallow any expense that was incurred by an individual for any purpose except gaining or producing income from a business or property including a membership in a golf club and any annual membership dues or fees in respect of a membership in a golf club.

Paragraph 18(1)(b) provides that in computing the income of a taxpayer from a business or property no deduction shall be made in respect of:

an outlay, loss or replacement of capital, a payment on account of capital... except as expressly permitted by this Part;

Generally, interest is considered a payment on account of capital. Paragraph 20(1)(c) of the Act permits the deduction of interest paid or payable in certain circumstances provided that it is incurred for the purpose of gaining or producing income from the business or property.

Subparagraph 20(1)(c)(ii) of the Act applies to permit the deduction of interest on an amount payable for property acquired for the purpose of gaining or producing income. This would include a situation where a taxpayer has become indebted to a vendor as part of the purchase price of a property acquired by the taxpayer. However, the property must be acquired for an income producing purpose. In this regard, it is CCRA's view that the phrase "purpose of gaining or producing income" in subparagraph 20(1)(c)(ii) is considered to have the same meaning as the phrase "purpose of earning income" in subparagraph 20(1)(c)(i). Subparagraph 20(1)(c)(i) requires that the interest expense sought to be deducted be on "borrowed money used for the purpose of earning income from a business or property."

The finding of the purpose for the use of borrowed money or an amount payable for property, as the case may be, will be a question of fact.

As explained under the heading "Capital Gain" below, income from property does not include any capital gain from the disposition of that property.

With respect to the case at hand, it is our view, based upon the incomplete information provided, that there may not be an income producing purpose to the acquisition of the Membership by the Individual such that the interest on the Note would not be deductible pursuant to paragraph 18(1)(b) and subparagraph 20(1)(c)(ii) of the Act.

Where there is income from a source that is a business or property

Paragraph 18(1)(l)

As mentioned above, the Act also provides limitations on the deductibility of certain expenses that were made or incurred by a taxpayer for the purpose of gaining or producing income from a business or property.

In this regard, paragraph 18(1)(l) or the Act provides specific limitations regarding the deductibility of expenses in respect of recreational properties and club dues in computing a taxpayer's income from a business or property. Specifically, paragraph 18(1)(l) provides that in computing income from a business or property no deduction shall be made in respect of the following:

Use of recreational facilities and club dues - an outlay or expense made or incurred by the taxpayer after 1971,

(i) for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility, unless the taxpayer made or incurred the outlay or expense in the ordinary course of the taxpayer's business of providing the property for hire or reward, or

(ii) as membership fees or dues (whether initiation fees or otherwise) in any club the main purpose of which is to provide dining, recreational or sporting facilities for its members;

Consequently, where a taxpayer who has income from a source that is business or property and has incurred an expense for membership fees or dues (whether initiation fees or otherwise) in a golf club paragraph 18(1)(l) of the Act would disallow the expense. The provisions of paragraph 18(1)(l) are broad enough to include not only the membership dues and fees, but also the interest expense.

Capital gain

Lastly, with respect to your comment to the effect that there could be a capital gain realized by the Individual on the disposition of the Membership "if" the interest on the Note is deductible we offer the following comments.

Subsection 9(3) of the Act states, in part, as follows:

In this Act, "income from property" does not include any capital gain from the disposition of that property...

(our emphasis added)

This provision specifies that a taxpayer's income or loss from a property computed under subdivision "b" (Income or Loss From a Business or Property) of the Act excludes any capital gain which is dealt with as a separate income source under subsection 3(b) and subdivision "c" (Taxable Capital Gains and Allowable Capital Losses) of the Act.

As such, notwithstanding the fact that interest paid on an amount payable for property acquired (i.e. the Membership) may not be deductible ("Non-deductible Interest") in computing income from property under subdivision "b" of the Act, any gain on the disposition of the property (i.e. the Membership) shall be included in determining the capital gain for the year from the disposition of property computed pursuant to subdivision "c" of the Act.

However, there is no provision in the Act that would permit the addition of the Non-deductible Interest in the adjusted cost base of the property (i.e. the Membership) such that it would not reduce any gain or increase any loss otherwise determined under the Act on a disposition of the property (i.e. the Membership). In this regard, we are informed by the findings of the Federal Court of Appeal in its decision in The Queen v. Geoffrey Stirling, 1985 DTC 5199 (FCA), wherein the court considered the deductibility of interest paid by a taxpayer on the unpaid portion of the purchase price of gold bullion from the proceeds of disposition and concluded that the interest paid should be disallowed. The Court held that, for purposes of computing capital gain:

cost means the price that the taxpayer gave up in order to get the asset; it does not include any expense he may have incurred in order to put himself in the position to pay that price or to keep the property afterwards.

(Our emphasis)

Furthermore, the Non-deductible Interest is not "outlays and expenses... made or incurred... for the purpose of making a disposition" such that the Non-deductible Interest would not be deductible pursuant to subparagraph 40(1)(a)(i) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate