Groupe Y. Bourassa & Associés Inc. v. R, [1998] 1 CTC 2511

P.R. Dussault T.C.J.:

These are appeals in respect of the appellant’s 1990, 1991 and 1992 taxation years. In assessing the appellant for these three years, the Minister of National Revenue (the “Minister”) disallowed the deduction for certain expenses claimed as entertainment expenses on the grounds, first, that they were not incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(l)(a) of the Income Tax Act (the “Act”) and, second, that they were expenses contemplated by paragraph 18(1 )(7) of the Act.

That paragraph prohibits the deduction of any 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 his 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;

The appellant is a general insurance broker. The expenses claimed and disallowed for the three years in issue were $8,270, $6,153 and $10,877 for 1990, 1991 and 1992, respectively. With the exception of 1992 to which I will return, the amounts claimed represent 80 per cent of the amounts spent on certain sports and recreational activities, and more specifically, on golfing, hunting and fishing. The breakdown of the expenses incurred by the appellant in each of the years is as follows:

1990

— Golf

• $660 for membership in a golf club

• $1,678 for tournaments

• $ 1,254 for greens fees

• $3,043.77 for meals and beverages at the golf club

• $971.34 for purchases at the pro shop relating to prizes to be won in tournaments

— Fishing lodge

• $1,650 for the services of a guide at the fishing lodge

• $94.09 for fishing equipment

• $12 for gas

— Hunting

• $975 paid to a hunting outfitter

The appellant no longer contests the disallowance of the deduction claimed for the $660 membership in the golf club.

1991

Golf

• $860 for tournaments

• $ 1,920.40 for greens fees

• $392.18 for meals and beverages at the golf club

— Fishing

• $2,919.99 for the services of a guide

• $120 in alcoholic beverages

— Hunting

• $330 paid to an outfitter

— Other

• $1,140.81 paid to a yacht club

The appellant no longer contests the disallowance of the deduction claimed for the amount paid to the yacht club.

1992

— Golf

• $1,220 for tournaments

¢ $1,998.76 for greens fees

¢ $3,079.76 for meals and beverages at the golf club

• $ 1,344 for the purchase of prizes from the pro shop

— Fishing

• $2,450 for the services of a guide

— Hunting

• $200 paid to an outfitting operation

— Other

• $1,772.92 paid to a yacht club

The appellant no longer contests the disallowance of the deduction claimed with respect to the amount paid to the yacht club. It also acknowledges that $605.25, or 20 per cent of the expenses totalling $3,026.21 (part of the $3,079.76) claimed for meals at the golf club, is not deductible. One hundred percent of the expenses, totalling $3,026.21, were claimed, and in any event, under subsection 67.1(1) of the Act, only 80 per cent of all such expenses are deductible.

Counsel for the respondent argues that, in regard to the appellant’s payments for golf tournaments, it is reasonable to believe, given the testimony of Luc Bourassa for the appellant, that part of the expenses incurred (approximately 50 per cent) were not actually incurred to earn business income but rather to support certain humanitarian organizations for whose benefit some of the tournaments were organized. According to him, the effect of paragraph 18( 1 )(a) of the Act would be to make these expenses non-deduct- ible even though the appellant would probably have been able to avail himself of the provisions covering charitable donations to the extent that part of the price paid for these activities represented genuine donations to recognized organizations. As to that part of the expenses relating to golf tournaments which did not fall into this category and which might be better described as activities to promote the appellant’s business among its clients, counsel for the respondent argued that paragraph 18(1)(/) totally prohibits the deduction of those expenses. He referred in this regard to the judgment of the Federal Court of Appeal in Sie-Mac!.

In that case, a company invited seven major clients, five of its own employees and two employees of a related company for a three-day stay at a fishing lodge. Meetings were held for one or two hours each day and the rest of the time was spent on recreational activities, including fishing. The total cost to the company, some $12,800, included the cost of rooms, food, transportation (commercial and private aircraft), fishing, preserving the catch, permits, alcoholic beverages and tobacco.

The deduction was allowed by the Tax Court of Canada and the Trial Division of the Federal Court of Canada primarily because the taxpayer was not the owner and had not rented the fishing lodge, and because the expenses were for services comparable to those which could have been found in some major hotels. In fact, Jerome A.C.J. of the Federal Court observed that the abuse that occurred in regard to the deduction of certain entertainment expenses arose from the fact that some taxpayers maintained recreational facilities (of which they were the owners or which they leased) so that they could be used to entertain their clients and that it had been decided to eliminate the deduction of this type of expense by drafting the exception set forth in paragraph 18(1 )(7) of the Act. He stated, at page 6345 of his judgement:

So the exception again confirms that the evil contemplated by this subsection is not the commercial use of country properties or fishing lodges instead of downtown hotels, but is related to property which is somehow in the possession of the taxpayer at which people are entertained.

And later, at page 6346, he concludes:

There would be no justice, no legal basis in principle for permitting this taxpayer to entertain his guests in downtown Edmonton or in Jasper, and not permit it at this facility, unless there is some very clear reason for doing so. If Parliament intends to make that distinction, I again say that it should do so.

This was precisely the point on which the decision was unanimously reversed by the Federal Court of Appeal, the judgment of which was unanimously affirmed by the Supreme Court of Canada. Linden J., who wrote the decision of the Federal Court of Appeal, clearly stated that he perceived the legislative policy as prohibiting the deduction of entertainment expenses at the locations designated in paragraph 18(1 )(7) since it was precisely in respect of expenses incurred at such locations or places that abuses were most likely to occur. However, he did not miss the opportunity to point out the anomaly in the result, although it is the responsibility of Parliament, should it so choose, and not the court, to rectify this. In this regard, he wrote, at page 6462 of his judgment:

The anomaly of allowing deductions for entertainment of customers in restaurants or hotels, but not on yachts in lodges is obvious, but it is within the authority of Parliament to make these distinctions if it so chooses. The fact that some may view these distinctions as unfair does not permit the Court to rectify that injustice.

The other important aspect of that decision concerns the distinction that counsel attempted to make between what might be called the direct costs of using the property referred to in paragraph 18(1)(/) and what could be referred to as indirect or incidental entertainment costs, which in that case included the cost of meals, transportation, preserving the catch, permits and the purchase of alcohol and tobacco. The Federal Court of Appeal categorically refused to make such a distinction and ultimately reached the conclusion that all entertainment costs, direct or indirect, associated with the use of the fishing lodge were covered by the exception in subparagraph 18(l)(7)(i) of the Act. On this point, Linden J. stated, at page 6463:

It was also argued by the Respondent, in the alternative, that if all the costs were not deductible at least some of them might be. He suggested that the expense associated with the “use” of rooms at the lodge might be forbidden, but the other costs such as food, transportation, etc. might be deducted. In my view, there is no merit in this contention. None of the costs incurred are deductible in this case. Had the customers been taken to dinner in Edmonton to discuss business the costs would have been deductible; if they had been flown to Vancouver, for a meeting at a hotel, those expenses too would have been allowable; however, the expense of flying up to a lodge for three days, even for a business purpose, is expressly made non-deductible. This was the very kind of thing the subparagraph was meant to stop.

The fact that this decision was confirmed unanimously by the Supreme Court of Canada leaves little room for interpretation even though the distinction may appear arbitrary or produce unfair results. Essentially, the judgment holds that all costs incurred to purchase entertainment at the locations mentioned, whether direct or indirect, are not deductible.

In the instant case, the expenses which the appellant continues to claim were incurred for recreational purposes, in order to provide entertainment for its clients, thereby promoting its business. Those expenses relating to golf were entertainment expenses relating to the direct use of a golf course or facility or were incidental to that use and I do not see how they can be exempt from the application of subparagraph 18(l)(7)(i). These expenses cover the cost of tournaments, greens fees and prizes offered to participants using the facilities during tournaments. If deducting the cost of using a golf course or facility is prohibited, it is difficult to see how deducting the cost of prizes offered to people participating in the tournaments and using the facilities could not be. That leaves the meals and beverages, which also appear to be covered, in view of the decision in Sie-Mac (supra) to the extent that they were provided at a facility that is an integral part of a golf club.

The expenses incidental to the use of a fishing lodge were incurred for the same purpose. They included the purchase of alcoholic beverages, the hiring of a guide and the purchase of gasoline for the boat. In my view, they are also covered by the same provision, as are the expenses associated with the cost of accommodation, meals, etc. relating to the use of the facilities or services of a hunting outfitter.

In short, having regard to the decision in Sie-Mac (supra), I am of the view that, even if all of the expenses still claimed by the appellant could be considered as having been incurred for the purpose of producing income from a business so that deducting them would not be prohibited under paragraph 18( 1 )(a) of the Act, they are nevertheless all covered by subparagraph 18(1 )(J)(i) which prohibits the deduction of both direct and indirect or incidental expenses relating to the use of a property referred to in that subparagraph. This is particularly true given that the expenses were essentially incurred for recreational purposes or for entertaining the appellant’s clients with the aim of promoting its business.

In my view, the assessments are therefore correct and I must dismiss the appeals by the appellant for its 1990, 1991 and 1992 taxation years.

Appeal dismissed.