7 August 1991 Income Tax Severed Letter - Deductibility of Annual Golf Fees

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.

Dear Sirs:

This is in reply to your letter of June 4, 1991, concerning whether or not certain annual golf fees are denied under paragraph 18(1)(l) of the Income Tax Act (the Act).

XXX

Subparagraph 18(1)(l)(i) of the Act provides in part that in computing a taxpayer's income from a business or property, no deduction may be made for any outlay or expense made or incurred by the taxpayer for the use or maintenance of a XXX 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.

XXX However, as membership fees are specifically described in subparagraph 18(1)(l)(ii) thus denying a deduction for such fees, you have expressed concern with the application of this provision.

As it seems that the above information relates to an actual fact situation, we are unable to provide you with specific comments thereon. For the purposes of obtaining the Department's position on your particular situation where completed transactions are involved, you should contact officials of your local District Office. On the other hand, if proposed transactions are involved, you may wish to consider the submission of an advance income tax ruling request. The procedures for submitting such a request are set out in Information Circular 70-6R2. We are, however, prepared to offer you the following general comments.

In a situation where a taxpayer is required to pay membership dues described in paragraph 11 of IT-148R2 Recreational Properties and Club Dues which entitle the tenants of the taxpayer's rental unit, or anyone else, to use the facilities the membership fees would be disallowed under subparagraph 18(1)(l)(ii). For the taxpayer to claim the expense in question on the basis that it fell within the exception in subparagraph 18(1)(l)(i) [i.e., that the outlay was in fact a maintenance expense that was incurred in the ordinary course of his business of providing the use of the facilities for hire or reward], there are some issues that would need to be resolved before it could be determined whether or not the fees could be denied under paragraph 18(1)(l).

The first issue is whether the fees are in substance "annual membership dues or fees" for the purposes of subparagraph 18(1)(l)(ii) rather than maintenance costs (i.e., consideration would be given to substance over form). The limited information contained in your correspondence would lead us to conclude that the expense represented membership dues.

The second issue, assuming that the expenditures represent maintenance costs, is whether these costs were actually incurred by the taxpayer or whether the amount billed by the club was simply computed by reference to the costs of maintaining the facility.

A third consideration is that, to be deductible, the maintenance costs would have to be incurred by the taxpayer in the course of carrying on the business of operating the club or recreational facility for hire or reward, for the purposes of paragraph 18(1)(l)(i). For this to occur, it would be necessary for the taxpayer to have ownership rights or a leasehold interest in the property in question.

Where it can be established that the taxpayer has in fact incurred maintenance costs but he is not considered to be in the business of providing property for hire or reward, the comments contained in paragraph 7 of IT-148R2 may have application. This paragraph reflects the Department's position that the "incidental" income from property rental may be offset by related non-allowable maintenance expenditures. This position has been extended, in cases where income from the rental of the property exceeds non-allowable maintenance expenses, to allow an offset of those expenses against the related rental income.

Depending on the facts of a particular situation, there may also be other considerations. If you wish to pursue the matter you should proceed as outlined in the fifth paragraph of this letter.

We trust that these comments will be of assistance to you.