Paragraph 18(1)(c) - Limitation re exempt income

Administrative Policy

4 October 1999 External T.I. 9916675 - WORKERS COMPENSATION OR PENSION

Awards for non-economic loss or future economic loss received under the Workplace Safety and Insurance Act (Ontario) would be considered to be workers compensation under s. 56(1)(v) rather than pension income under s. 56(1)(a).

Paragraph 18(1)(e) - Reserves, etc.


Industries Perron Inc. v. Canada, 2013 FCA 176

term deposits paid to secure potential anti-dumping duty

The taxpayer ("Perron") made cash term deposits in connection with its potential liability for countervailing and anti-dumping duties imposed by American trade authorities on Canadian softwood lumber exports, to the Royal Bank and pledged them in favour of the bank as security for irrevocable letters of credit issued by the bank to Perron's insurance company, which in turn issued a bond guaranteeing Perron's potential liability to the U.S. government. When the U.S. decided not to levy duties in 2002, the bond was released, the letters of credit expired and Perron received back the term deposits. Perron deducted the full amount of the term deposit as an expense in computing its income for the 2001 taxation year and included the same amount in income for its 2002 taxation year.

After finding (at para. 29) that as Perron retained an interest in the term deposits, they did not constitute an outlay or expense for purposes of s. 18(1)(a), Pelletier JA went on to state (at para. 30):

Furthermore, the amounts paid to the Royal Bank were in the nature of a reserve, or a fund set up to cover a contingent liability, as was the case in Nomad. Perron had no liability for countervailing or anti-dumping duties until such time as a final determination was made. Until that time, Perron simply had an obligation to ensure that it was in a position to pay the duty owing in the event of an adverse final determination. If no adverse determination was made, the funds would be returned to Perron. On the facts, that is exactly what happened. I am therefore of the view that the amounts paid to the Royal Bank were not deductible because they were in respect of a contingent liability, as provided in paragraph 18(1)(e) of the Act.

De Graaf v. The Queen, 85 DTC 5280, [1985] 1 CTC 374 (FCTD)

amounts paid into court re future liens

The taxpayer disposed of a property and reported a business loss in his 1975 tax return. In computing the loss, the taxpayer deducted from the proceeds of sale of a property amounts paid into court in connection with outstanding liens placed on the property at the time a building was constructed on it, even though the amount remained in court for some time after 1975. In agreeing with the Minister's position that the amount was not deductible in the 1975 year, Strayer J stated (at pp. 5283-4):

The jurisprudence seems amply clear that a reserve for the possible future payment of liens is contingent because it is impossible to know, until matters are finally settled, how much will actually be owing and therefore money held in reserve for such purposes is not deductible as an expense until the amounts actually owing are ascertained... . Therefore even though some or all of the amount of $35,850.19 might be regarded as a business expense, and potentially part of a business loss, in some taxation year, it could not properly be so regarded in 1975.

Canada v. General Motors of Canada Ltd., 2008 DTC 6381, 2008 FCA 142

A collective agreement between the taxpayer and the CAW, as amended by them following the decision of the Federal Court of Appeal for the earlier taxation year, continued to create only an absolute liability of the taxpayer to add to a notional fund an amount of $2 per overtime hour worked by all covered employees in excess of 5% of straight time hours, but without creating an absolute liability to pay those amounts. As the liability was thereby contingent, the taxpayer was not entitled to a deduction in respect of the addition to the notional fund.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence parol evidence excluded 261

Canada v. McLarty, 2008 DTC 6354, 2008 SCC 26, [2008] 2 S.C.R. 79

The full purchase price of $100,000 for the acquisition by the taxpayer of seismic data represented Canadian exploration expense to him notwithstanding that $85,000 of the purchase price was satisfied by a promissory note for $85,000 which would be paid down during its term out of a portion of cash proceeds received from any future sales or licensing of technical assets and of production cash flow generated from petroleum rights from drilling programs. The note did not represent a contingent liability because it provided that should any amount be outstanding at maturity, the holder of the note would have recourse to specified security (in such event a trustee was to be appointed to sell seismic data with the proceeds of sale being allocated as 60% in reduction of the remaining amounts owing under the note). Rothstein J. stated (at para. 33):

"The Minister seemed to be saying that if there is risk to the value of the collateral security at maturity, liability is contingent because the creditor may not make full recovery of the total liability. If the Minister were correct, all liability would be contingent."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) decision making not subordinated to the other/structured arrangement 138
Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (a) limited recourse promissory note 187

General Motors of Canada Ltd. v. Canada, 2004 DTC 6716, 2004 FCA 370

Under a collective agreement with its union, the taxpayer agreed to accrue $2 per every overtime hour worked by covered employees in excess of 5% of straight time, with the accrued amounts to be used to support childcare programs, legal services plans, a suplementary unemployment benefits plan "only if needed", or to fund jointly agreed initiatives with the union. The accrued amounts were not deductible in light of s. 18(1)(e) since they were not contributed to a qualified trustee or othewise segregated or set aside from ordinary working capital, and there was no identifiable creditor who could make a legally enforceable claim against the taxpayer with respect to the accrued amounts.

Wawang Forest Products Ltd. v. The Queen, 2001 DTC 5212, 2001 FCA 80

potential for holdback amounts not to be claimed did not render them contingent

If the taxpayer paid a logging contractor in full upon delivery to it of cut wood, it would be subject to liability to the workers' compensation board to the extent of unpaid workers' compensation contributions of the contractor. Accordingly, pursuant to terms in its contracts with the contractors, the taxpayer withheld from the payments made to them amounts (e.g., $0.50 per metric tonne of cut wood) that were estimated to be at least equal to the contribution liabilities of the contractors.

Reassessments that treated portion of contract payments that had been held back as not being deductible until paid, were ordered to be reversed. Sharlow J.A. found that a legal obligation to pay the full contract amounts came into existence when the contractual obligation (delivery of wood) had been performed. Before noting the evidence that in some cases contractors never claimed the holdback amounts, she stated that "an obligation to pay a certain amount does not become a contingent obligation merely because events may occur that result in a reduction in the quantum of the liability", and later also indicated that (notwithstanding statements of Desjardins J.A. in the Newfoundland Light case to the contrary), a "legal obligation to pay an amount may exist even if there is some risk that the actual payment may be set off against potential counter claims".

Ticketnet Corp. v. The Queen, 99 DTC 5409, [1999] 3 CTC 564 (FCTD)

The taxpayer agreed with Air Canada that: Air Canada would develop a software program for a price of $2 million; for the first five years following the acceptance of the developed software by the taxpayer Air Canada would receive an amount of $0.05 per ticket sold by the taxpayer; if this resulted in repayment of the $2 million Air Canada would continue to receive that amount per ticket sold as an investment bonus during the five-year period; Ticketmaster would pay additional stipulated royalties to Air Canada; and if Air Canada did not receive payment of the $2 million, it would have an option to acquire the software for an amount equal to the unamortized balance. The arrangement was terminated by Air Canada after it had largely completed the software development and before the software was accepted by the taxpayer.

In rejecting a submission of taxpayer's counsel that the arrangement should be construed as a services contract coupled with an interest-free loan of $2 million by Air Canada to the taxpayer, Evans J. stated (at p. 5415) that "the terms of the contract do not impose on Ticketnet an unequivocal obligation to repay money lent, one of the defining legal characteristics of a loan". Respecting an alternative submission that the services agreement itself represented a debt, Evans J. stated (at p. 5417) that "the fact that Ticketnet would not be liable to pay if Air Canada failed to deliver the software, or the software that it delivered was not accepted by Ticketnet for good reason, is sufficient to make the debt contingent as defined in Samuel F. Investments Ltd. ...". Finally, although both the parties might "... have agreed that Ticketnet was liable to pay $2 million to Air Canada for services rendered, a liability that terminated on the good faith non-acceptance of the software ... this is not what the contract provide[d]". Accordingly, s. 18(1)(e) precluded the taxpayer's claim to a scientific research and development tax credit under ss.37(1) and 127(5).

Canadian Pacific Ltd. v. Minister of Revenue (Ontario), 99 DTC 5286, 41 OR (3d) 606 (Ont CA)

Upon receipt of notice of an award by the Workman's Compensation Board, the taxpayer would calculate the amount of the award on the basis of the life expectancy of the worker (using actuarial tables), and add that amount to a deferred liability account. The amount so added was expensed in the year for tax and accounting purposes, with subsequent adjustments being made as estimates changed.

Borins J.A. found that at the time the account was set-up the taxpayer had a statutory obligation which "was to be considered as subsisting until satisfied, or an event occurred which resulted in its termination" (p. 619) and that "where a taxpayer has incurred a liability in a taxation year, and has placed money into an account to enable it to fulfill the liability, uncertainty surrounding the amount which will ultimately be paid will not per se result in the liabilities being classed as contingent" (p. 621). Accordingly, the amounts added to the account were currently deductible.

B. Jolly Enterprises Ltd. v. The Queen, 94 DTC 6636, [1994] 2 CTC 378 (FCA)

In finding that a corporate taxpayer was not entitled to deduct expenses incurred prior to its formation and pursuant to an alleged contract between it and an individual promoter, Marceau J.A. noted that s. 18(1)(e) prohibited the deduction of contingent liabilities, and here the obligation in the alleged contract was subject to a condition that the taxpayer be "up and running", a condition which was only realized months later.

The Queen v. Foothills Pipe Lines (Yukon) Ltd., 90 DTC 6607, [1990] 2 CTC 448 (FCA)

The taxpayer, which had incurred various expenses in respect of the second phase of a pipeline project which had not yet been constructed, was permitted by the National Energy Board to levy a special charge to Alberta producers of natural gas in respect of those costs. The Board indicated that it intended to make changes to the applicable regulations that would have the effect of refunding the special charge to the Alberta producers, and in the meantime required the taxpayer to give an undertaking to the Canadian government to repay the special charges.

Urie J.A. found that given that the date of completion of the second phase was unknown (and that date must occur before the requirement to repay could be implemented), the obligation to repay the special charges was uncertain and therefore contingent.

Wil Mechanical Ltd. v. The Queen, 90 DTC 6475, [1990] 2 CTC 224 (FCTD)

Although the taxpayer, as the subcontractor on various jobs, withheld 15% from the amounts it paid to the sub-subcontractors until, generally, the time that the work performed by the sub-subcontractors was approved by an engineer, McNair J. found that the sub-subcontractors were legally entitled to the full amount of the progress estimates at the time they submitted their invoices therefor. On this basis, it was found that the taxpayer's obligation in respect of the monies withheld from its sub-subcontractors was not contingent.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 92
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Timing subcontractors entitled to holdback amounts 83

Newfoundland Light & Power Co. Ltd. v. The Queen, 90 DTC 6166, [1990] 1 CTC 229 (FCA)

Before finding against the taxpayer on other grounds, the Court accepted that the reference to "contingent account" refers to accounting practice.

Westcoast Petroleum Ltd. v. The Queen, 89 DTC 5153, [1989] 1 CTC 363 (FCTD)

Northern Central Gas was followed. Teitelbaum J. noted (p. 5167) that although "where amounts are put into reserve accounts to cover liabilities which are legally binding and ascertainable on the taxation year but which may not be enforced until a later date, such amounts in certain circumstances may be deducted from income", here there was no legally binding obligation on the taxpayer to refund the amounts in question to third parties at the end of the taxation year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) no reserve for revenues collected at excess rate 98
Tax Topics - Income Tax Act - Section 9 - Timing future obligation for offsetting tariff reduction 108

TNT Canada Inc. v. The Queen, 88 DTC 6334, [1988] 2 CTC 91 (FCTD)

At the end of its 1980 taxation year, the taxpayer (a common carrier) deducted $125,385 for the total of cargo claims which had been filed against it by its customers, and a further reserve of $50,000 as an estimate for potential claims of customers for damaged or lost goods. Since payment of any claim was something that might not happen, these reserves were non-deductible as contingent amounts.

Sears Canada Inc. v. The Queen, 86 DTC 6304, [1986] 2 CTC 80 (FCTD), aff'd 89 DTC 5039 (FCA)

Sears included in income amounts which it received from customers for its agreement to maintain and repair the sold products for a further year beyond the expiry of the one-year warranty period, and then deducted the same amounts from its income (to the extent that the agreement had not been terminated by the customer returning the product). It was found that in the absence of s. 20(1)(m) (before giving effect to s. 20(7)) the deductions would have been prohibited by s. 18(1)(e). The liability under a maintenance agreement was contingent in nature because "while it was certain that the plaintiff would be called upon to deliver goods and render services to its maintenance agreement customers, the obligation to do so did not arise until it was contacted by those customers." In addition, the amounts sought to be deducted were contingent because "the actual amount of the plaintiff's liability under the maintenance agreement was unascertained and unascertainable at the end of each of the taxation years".

Northern and Central Gas Corp. Ltd. v. The Queen, 85 DTC 5144, [1985] 1 CTC 192 (FCTD), aff'd 87 DTC 5439, [1987] 2 CTC 241 (FCA)

aff'd on other grounds 87 DTC 5439 (FCA)

It was anticipated by the taxpayer that in its 1978 taxation year it would be required by the Ontario Energy Board to pass along to its customers the amount of a gain on the sale of its inventory which it had realized in 1977 as the result of a rate increase. It was held that since there was no legal liability on the taxpayer at the end of 1977 to "refund" the amount of the gain to its taxpayers, that amount could not be deducted from its 1977 income.

Consolidated-Bathurst Ltd. v. The Queen, 85 DTC 5120, [1985] 1 CTC 142 (FCTD), aff'd on different grounds, 87 DTC 5001, [1987] 1 CTC 55 (FCA)

Semble, that "insurance" premiums paid by the plaintiff to an arm's-length Canadian insurance company, which in turn re-insured various risks with a wholly-owned Bermudan subsidiary ("OI") of a wholly-owned Canadian subsidiary of the plaintiff "were in effect amounts transferred to a reserve fund and [were] therefore not deductible by virtue of paragraph 18(1)(e)". Strayer, J. stated that "the 'insurance program' must be seen as a device for channelling funds from the plaintiff to one of its own instrumentalities over which it had complete control, and to which it would have to look to pay losses on risks retained by OI ... . Any surplus OI might enjoy would ultimately be under the control of the plaintiff ... Any losses which OI did not have assets to cover would have to be borne by the plaintiff. The net result is similar to the establishment of a reserve fund ...".

Amesbury Distributors Ltd. v. The Queen, 85 DTC 5076, [1984] CTC 667 (FCTD)

A distributor of television sets charged dealers a flat fee of $30 per set in return for providing after-sales servicing of the sets under a three-year warranty, and credited 2/3 of the fees received to its "Unearned Income" account. It was held that the full amounts received were income to the distributor, and that no amount could be deducted for the "unearned" portion of the fees due to the prohibition in s. 18(1)(e) against the deduction in respect of an account for a contingency. The distributor "had no way of knowing which particular machine would break down or how many nor in what time frame".

Cummings v. The Queen, 81 DTC 5207, [1981] CTC 285 (FCA)

Since the liability of the taxpayer at the end of its 1968 taxation year to pay $500,000 to a prospective tenant was contingent inter alia upon that tenant paying compensation to the landlord of the tenant's present premises for vacating (at the beginning of the 1969 taxation year) those premises, and since that contingency did not occur until after the 1968 year-end, the amount of that still-contingent liability was not deductible from its 1968 income. A claim against the taxpayer which was not settled until after the year-end also was non-deductible because of its contingent nature.

McClain Industries of Canada Inc. v. The Queen, 78 DTC 6356, [1978] CTC 511 (FCTD)

As at the end of each fiscal year a company accrued the amount of a management bonus, and during the following year the company's executive-shareholders would receive their sole remuneration by drawing against the amount that had been set up in the previous year. The fact that (as happened twice in the course of 22 years) the directors might, if they considered that business conditions so demanded, reduce or cancel the amount that had been set up, was not a contingency which negated the fact that the amount set up in the company's books constituted an existing liability.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) 42

Harlequin Enterprises Ltd. v. The Queen, 77 DTC 5164, [1977] CTC 208 (FCA)

Sales of books were made each year by the taxpayer to a distributor. The taxpayer was obligated to repurchase any books which the distributor might elect to return. The taxpayer at the end of each year was not entitled to deduct a reserve in respect of estimated returns. "[T]he provision for returns [was] contingent, because in any fiscal period, although it was known from experience that there would be returns, the number and actual value thereof could not be fully known until all returns on sales made within that fiscal period had actually been received" (p. 5166). The acceptability of the reserve and accounting practice did not make the reserve a proper deduction from income for tax purposes.

Day & Ross v. The Queen, 76 DTC 6433, [1976] CTC 707 (FCTD)

Insurance premiums were payable each year by the taxpayer pursuant to a Lloyds policy which established the premiums payable for each year in accordance with a formula which included "reserves, as estimated by the Insurers for outstanding losses, outstanding at the time of adjustment." The taxpayer was able to deduct the amount which it estimated at the end of each year to be what the adjustment would prove to be. For each year, its estimate was less than what it ended up paying to Lloyds. Dube, J. stated that "the amounts entered as expense were definitely owing and payable and were in fact paid."

The Queen v. Ken & Ray's Collins Bay Supermarket Ltd., 75 DTC 5346, [1975] CTC 504 (FCTD)

Kerr, J. indicated, obiter, that s. 18(1)(e) would have applied to unpaid bonuses which the taxpayer sought to deduct: "When the decision to pay bonuses was taken in the fall of 1968 the amount that would be paid was uncertain, although a range of $25,000 to $30,000 was decided, and payment was contingent on necessary funds being available".

Mister Muffler Ltd. v. The Queen, 74 DTC 6615, [1974] CTC 813 (FCTD)

Reserves set up for a "guarantee" to replace mufflers installed by the taxpayer were implicitly treated as a contingent account.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(7) - Paragraph 20(7)(a) agreement to replace any defective installed muffler was warranty etc. 122

The Queen v. Jawl Industries Ltd., 74 DTC 6133, [1974] CTC 147 (FCTD)

The price of lumber declined after the taxpayer contracted to purchase lumber at a stipulated price for delivery in a subsequent taxation year. Since the taxpayer would not actually suffer a loss as a result of such a price decline until the time of delivery when it acquired the lumber, the accrual of a loss for undelivered inventory was prohibited.

It was noted that the lower of cost and market rule for inventory contained in s. 14(2) of the pre-1972 Act permitted the recognition of a "hidden reserve" whose deduction otherwise would have been prohibited by s. 12(1)(e) of the pre-1972 Act. However, the contract was not itself inventory.

J.L. Guay Ltée v. MNR, 71 DTC 5423, [1971] CTC 686 (FCTD), aff'd 73 DTC 5374, [1973] CTC 506 (FCA), aff'd 75 DTC 5094, [1975] CTC 97 (SCC)

A general building contractor in accordance with the terms of its contracts with its subcontractors withheld 10% of the amounts invoiced on a monthly basis to it by its subcontractors. The amounts withheld became due 35 days after a completion certificate was issued by the architect. Since it was far from certain that the withheld amounts would be paid in full (or even in part) to the subcontractors, they were not deductible in the year of withholding.

Words and Phrases

Lawson v. Minister of National Revenue, 69 DTC 5155, [1969] CTC 201, [1969] S.C.R. 587

It was submitted on behalf of a mining stock promoter that he should be permitted to follow the "project" method of accounting in determining the cost of his speculative shareholding in a junior mining company, i.e., deducting the receipts from the sale of the shares against the cost of all his shares until the entire cost of the venture was recovered, and only recognizing income to the extent that the cumulative amount of the proceeds received by him exceeded the aggregate cost of his shares. Pigeon J., in finding that this method contravened what then was s. 12(1)(e) stated (p. 5158):

"What appellant is really trying to accomplish by this "project" method of accounting is to set up against the contingency that his inventory might drop in value, a reserve equal to his profit so far on the operation."

Time Motors Limited v. Minister of National Revenue, 69 DTC 5149, [1969] CTC 190, [1969] S.C.R. 501

The taxpayer, which was a used car dealer, issued credit notes in partial payments of used cars acquired for resale. The notes were not transferrable, were valid only within a stated period of time (generally one or two years) and were good only for the purchase of a car of the taxpayer of not less than a stated value. Pigeon J. found that the issuance of the credit note gave rise to an immediate enforceable obligation rather than a contingent liability after noting that the wording of s. 12(1)(e) "clearly refers to accounting practice" (p. 5151).

Meteor Homes Ltd. v. MNR, 61 DTC 1001, [1960] CTC 419 (Ex. Ct.)

Kearney J. rejected a submission that a retail sales tax liability of the taxpayer (whose payment had not yet been demanded by the Québec provincial government) was a contingent amount in light of an action in which the validity of the Retail Sales Tax Act (Québec) was being challenged. He relied on a statement in Mertens to the effect that "a condition precedent to the creation of a legal right to demand payment effectively bars the accrual of income until the condition is fulfilled, but the possible occurrence of a condition subsequent to the creation of a liability is not grounds for postponing the accrual" (p. 1008) in finding that there was no condition precedent to prevent the provincial authorities from bringing a claim against the taxpayer, and went on to state (p. 1008) that "the validity of a statutory law must be presumed until the contrary is proved."

Robertson Ltd. v. MNR, 2 DTC 655, [1944] CTC 75 (Ex Ct)

Thorson J., before finding that the taxpayer could exclude unearned insurance premiums from its income on other grounds, stated, with respect to s. 6.1(d) of the Income War Tax Act (at pp. 658-659):

"The deductions prohibited by the paragraph under discussion would, in my opinion, not be permissible, even if the paragraph were not in the Act at all, for they really are dispositions of income after it has been received ... [E]very reserves set up out of profits or gains of whatever kind, which seeks to provide against the happening of uncertain future events, is excluded as a deduction, except insofar as the Act permits."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing 304

See Also

Industries Perron Inc. (anciennement 3654419 Canada Inc.) v. The Queen, 2012 DTC 1072 [at 2836], 2011 TCC 433, aff'd 2013 FCA 176

Angers J. denied the taxpayer's deduction of a reserve it made in respect of preliminary anti-dumping rulings against it from the International Trade Commission ("ITC") and the U.S. Department of Commerce ("DOC") respecting the importing of lumber, notwithstanding that the taxpayer was required to post cash deposits as security for its potential obligation. The anti-dumping duties were not deductible by virtue of s. 18(1)(a) and (e) because the taxpayers did not have a duty to pay until the ITC and DOC made their final determinations (although it did have a duty to either pay or create a bond before customs would allow the importing), nor was the amount of the payment certain until then.

Fèdèration des Caisses Populaires Desjardins, 2000 DTC 1585 (TCC), rev'd on second (statutory contribution) issue 2002 DTC 7413 (FCA)

The employees of the taxpayer earned vacation leave during a reference period running from May 1 to April 30 each year. When they took their vacation leave in the following twelve-month period, they would receive generally 2% of all their earnings during the reference period for each week of leave taken.

Before going on to find that the taxpayer was able to deduct, in each calendar taxation year, the vacation leave that had accumulated by employees to December 31 (estimated as 8% of the current year's payroll) on the basis that the accrued vacation pay represented a "real legal liability that exists during the reference year but will be paid in a future year", Lamarre TCJ. stated (at p. 1595):

"As regards the meaning to be given to the word 'reserve' as used in the English version of paragraph 18(1)(e), in my view it cannot have any meaning other than the one given to the word 'provision' in French terminology." Lamarre TCJ. went on to find that various statutory contributions could not be deducted until paid because the "obligation to make those employer contributions does not arise until the vacation pay is actually paid" (p. 1596) and noted that where only a "suspensive condition" exists there is "not yet any actual relationship between the future creditor and the future debtor". Such a relationship existed for the accrued vacation pay, but not the employer statutory contributions.

Words and Phrases
provision reserve

Dibro Investments Ltd. v. MNR, 87 DTC 210, [1987] 1 CTC 2281 (TCC)

Although the taxpayer was obligated to pay 10% of its revenues to its franchisor, it was held these payments in the taxation years in question in order to put pressure on the franchisor to enter into negotiations for a rate reduction. Such negotiation actually commenced after the taxation years in question, and resulted in a reduction in the amounts the taxpayer ultimately was required to pay in respect of the taxation years in question.

In finding that the taxpayer was entitled to deduct the accrued amounts owing to the franchisor without rate reduction, Bonner TCJ found that in the years in question, the liability for those amounts was fixed and certain.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense liability incurred notwithstanding subsequently negotiated reduction 104

Barbican Properties Inc. v. The Queen, 97 DTC 122, [1996] 2 CTC 2615 (TCC), briefly aff'd 97 DTC 5008 (FCA)

The taxpayer financed the purchase of "distressed" properties from the Royal Bank through non-recourse loans received from the Royal Bank which provided that to the extent that net operating revenue from each property was insufficient to cover the interest payable in that year, it was entitled to defer payment of the interest until the earlier of the maturity of the loan or the sale of the property. The interest whose payment, in fact, was deferred under these arrangements was not deducted by the taxpayer in its financial statements.

In affirming the denial by Revenue Canada of the deduction of the deferred interest, Margeson TCJ. found that there was uncertainty as to whether payment of the deferred interest ever would occur and that the deferred interest liability was contingent rather than a binding future liability.

Alfred Dallaire Inc. v. MNR, 96 DTC 1094, [1996] 1 CTC 2218 (TCC)

The taxpayer, which ran a funeral home business and agreed with many of its customers to provide the required funeral services on each customer's death in consideration for a lump sum paid by the customer at or shortly after entering into the contract, also entered into a contract with the Fiducie du Quebec (the "Trustee") under which it was agreed that the Trustee would credit all sums of money delivered to it into a capital account, and credit 40% of all income earned on the capital account and a reserve account into that reserve account.

Garon TCJ. found that the taxpayer's obligation to pay amounts into the reserve account arose in the course of its current operations in order to protect the amounts deposited by the customers from the effects of inflation, and that the amount so credited were not subject to the prohibition in s. 18(1)(e) because they were on account of a contractual liability established under the agreement with the Trustee.

Johnston v. Britannia Airways Ltd., [1994] BTC 298 (Ch. D.)

Before going on to affirm a finding of the special commissioners that the taxpayer was entitled to accrue in advance the cost of periodic major engine overhauls, Knox J. stated (p. 316) that "the fact that a liability is contingent or future in the sense that it will not fall to be discharged in the relevant accounting period is not a bar to the making of a proper provision against that liability in that accounting period".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing 203

I.B. Pedersen Ltd. v. The Queen, 94 DTC 1085, [1994] 1 CTC 2355 (TCC)

The taxpayer, which operated a waste landfilled site, was required to include in income the full amount of fees received from a municipality for its dumping of waste at the site, and was not able to deduct a reserve for remediation costs that it anticipated it would become obligated to expend following the closing of the site. In the relevant taxation years, it was not liable for these potential expenses.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) no deduction for future remediation work 55

Co-operator's General Insurance Co. v. MNR, 92 DTC 303 (TCC)

Brulé J. found that the amounts deducted by the taxpayer in excess of the amounts actually payable in the year pursuant to the formula in the relevant reinsurance treaty represented in substance a contingent liability under generally accepted accounting principles (notwithstanding expert evidence to the contrary) in that there was uncertainty as to whether there would be legal liability to pay the maximum premium.

Pioneer Designs Corp. v. MNR, 91 DTC 293, [1990] 2 CTC 2446 (TCC)

Before finding accrued bonuses to be deductible, Garon TCJ. stated (p. 300): "No authority has been cited to me that would require ... the existence of a stipulation that would set out the precise time for the payment of the bonuses."

Dunblane Estates Ltd. v. MNR, 89 DTC 137, [1989] 1 CTC 2248 (TCC)

The taxpayer was obligated under its collective agreement to let employees claim against their accrued and unused sick leave credits when they or a family member were ill, and to pay 50% of the credits to them on termination of employment otherwise than for a cause. The taxpayer deducted as accrued the full amount of the credits notwithstanding that the pay-out rate averaged approximately 75%. Before finding that the amount that the taxpayer accrued at the end of its taxation year as an addition to its sick leave credit "fund" was not deductible under s. 18(1)(e), Kempo TCJ. stated (at p. 145):

"While a distinction may be drawn between contingencies which affect liability itself and those which affect only the quantum of that liability, any meaningful distinction tends to become blurred as the number and complexities of contingencies increase."

Southern Pacific Insurance Co. Ltd. v. C.I.R., [1986] BTC 181 (PC)

It was held in relation to an insurance company that "the amount of the liability of the company for accidents which occurred but were not reported in a particular year, is part of the expense of the company in carrying on its insurance business during that year."

Fred Nesbit Distributing Co. v. U.S., 85-2 USTC 89580 (D.C. Iowa)

The taxpayer, which was a wholesale beer distributor, collected a deposit when it sold beer to dealers, and the dealers were required by law to charge a deposit on sales to consumers and to refund the deposit when the empty container was returned. The taxpayer was required to pick-up from its dealers return containers of the brand and size sold by it and pay to the deposit amount.

Because the taxpayer's liability to refund container deposits was contingent upon the tender of the container by the retailer and did not arise at the moment Nesbit sold the container to the dealer, such liability was contingent and no deduction could be made for it. [C.R: "9 - Timing"]

Canada Packers Ltd. v. MNR, 68 DTC 682 (TAB)

Because the taxpayer's fiscal year ended in the last Saturday in March of each year, it was possible for it to pay holiday pay for two Good Fridays in a fiscal year, or for none at all (as in the case of the taxation year in question). At the beginning of each calendar year, the taxpayer calculated total liability for holiday pay and charged to operating expense for each week in the calendar year a fixed percentage of the total liability.

After finding that the portion of the holiday pay accrual that related to the Good Friday that occurred subsequent to the taxpayer's fiscal year end was not deductible by virtue of s. 12(1)(a) of the pre-1972 Act. Mr. Weldon went on (at p. 689) to indicate (in relation to s. 12(1)(e)) that "the word 'contingency' suggests some uncertainty, and there was clearly no uncertainty about the appellant's liability for statutory public holidays". He also noted that it should be borne in mind that the taxpayer's liability was subject to the employee's obligation to have been present at work on the preceding and following business day except as permitted.

Quebec Photo Service Inc. v. MNR, 67 DTC 315 (TAB)

The taxpayer credited to a special account for each employee an amount equal to a half-day's salary for every month of employment, which the employee could draw upon in the case of sickness and receive in cash if he resigned, was dismissed or (in the case of his estate) died. Mr. Boisvert found that the amount so credited represented a current debt of the taxpayer that was currently deductible by it.

Acadia Overseas Freighters Halifax Ltd. v. MNR, 62 DTC 84 (TAB)

Under the terms of its contracts of employment with Lascar seamen, the taxpayer undertook to pay the cost of transporting them to their native land at the conclusion of their contract of employment. In finding that the taxpayer was not entitled to deduct the estimated cost of repatriating the foreign seamen at the conclusion of their contracts, Mr. Boisvert stated (at p. 86) that the taxpayer had set aside the sum "so as to enable it to meet payments at some unascertainable dates and for unascertainable sums", and that "a liability to pay in futuro is a contingency, that is, something 'doubtful or uncertain, conditioned upon the occurrence of some future event which is itself uncertain or questionable'".

Capital Transit Ltd. v. MNR, 52 DTC 287 (ITAB)

The taxpayer, the operator of a bus service, credited all sales of tickets to a liability account, and took such amounts into income only when the tickets were used. Although the holder of a ticket had a right to request a refund, over 95% of tickets outstanding at the end of each fiscal period of the company would eventually be used for transportation.

In finding that the taxpayer was not entitled to deduct the amount of the liability for prepaid tickets in computing his income Mr. Fisher first noted that the full amount of the liability only represented an estimate of what the taxpayer might possibly be required to refund. On the other hand, if the company deducted only a reasonable estimate of the costs that it was likely to incur in providing the related transportation services, this would constitute the deduction of a reserve or contingent account.

J.J. Joubert Limité v. MNR, 52 DTC 317 (ITAB)

In finding that the taxpayer, a milk distributor, was not entitled to deduct amounts previously received by it represented by unredeemed prepaid milk tickets, Mr. Fordham stated (p. 318): "A quantity of the outstanding tickets would become either mislaid, lost or destroyed, or be indefinitely retained, and the remainder, or bulk, would eventually be presented for honouring or redemption. The value of this remainder would always be an unascertainable figure. A contingency thus arose ... Having regard to the contingency factor involved, the wording of these sections excludes the amounts now under consideration, even if they be termed a liability instead of a reserve."

Administrative Policy

28 January 2021 Internal T.I. 2019-0817641I7 - Acquisition of rights to pension surplus

purchased actuarial surplus was a reserve

A portion of the purchase price paid for the acquisition of a business of the Seller by the Purchaser was allocated to the actuarial surplus in a defined benefit pension plan (the “Plan”) for which the Seller was the sponsor and employer, with the Purchaser being assigned the Seller’s obligations under the Plan.

Although, in fact, the acquisition occurred before 2017, the Rulings Directorate also addressed what would have happened on a post-2016 acquisition, and concluded that the amount allocated to the actuarial surplus would not have qualified as the cost of a Class 14.1 property, and instead would have been a non-deductible capital expenditure. As part of its reasoning in so concluding, it found that having regard for the exclusion for an amount that is not deductible by virtue of a specific provision other than s. 18(1)(b), such amount was excluded by s. 18(1)(e), which prohibited the deduction for a reserve (“described by the courts as something set aside that can be relied upon for future use”) given that “any actuarial surplus in this case can be applied as a contribution holiday to relieve the Purchaser from its future contribution obligations.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Actuarial Surplus CRA finds that the purchase price of a business allocated to the actuarial surplus for a defined benefit plan was a non-deductible capital expenditure 517
Tax Topics - Income Tax Act - Section 78 - Subsection 78(4) s. 78(4) exclusion would apply to the purchase of actuarial surplus 191
Tax Topics - Income Tax Act - Section 13 - Subsection 13(35) purchased actuarial surplus was not deemed goodwill under s. 13(35) 222

S2-F1-C1 - Health and Welfare Trusts

actuarial reserve

1.50 Although actuarial studies of the trust may recommend the establishment of contingency reserves to meet its future obligations, transfers to such reserves are not deductible by a health and welfare trust in computing trust income subject to tax.14

22 February 2012 External T.I. 2008-0289021E5 - Fair Value Accounting - Liabilities

the correspondent noted that under the GAAP that prevailed in 2008 (contained in Section 3855 of the CICA Handbook) taxpayers whose financial liabilities were incurred for trading purposes were required to revalue those liabilities at fair value, and referred in particular to situations where such liabilities were revalued at a year end as a result of a change in prevailing interest rates.

CRA indicated that the income or loss arising for accounting purposes from such annual adjustments due to fluctuations in interest rates would not be recognized for purposes of the Act. Although CRA accepted the Canadian General Electric case, that "decision does not apply to the revaluation of a debt due to interest, credit or other adjustments." Furthermore, s. 18(1)(e) "specifically denies a deduction for reserves and contingent liabilities."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit financial liabilities not to be marked to market 138
Tax Topics - Income Tax Act - Section 9 - Timing liabilities not to be marked to market 138

4 May 2010 External T.I. 2009-0329391E5 F - Provision pour retour de marchandises

no reserve where book publisher’s customers could return unsold books, cf. where a "true" clause for the return of unsold goods

The contracts for sales by a book publisher to its customers provide that books which have not been sold within 12 months may be returned. Would a reserve for returns be available? After indicating that no reserve under s. 20(1)(m) was available, and confirming its position in IT-215R, para. 13, CRA stated:

[A] clause permitting the return of goods not sold by customers is not a clause contemplated by paragraph 13 … where title passes to the purchaser upon delivery, well before the expiry of the time limit for the return of goods.

A "true" clause providing for the return of unsold goods is a clause under which ownership of the goods does not pass to the buyer and under which there is no obligation to pay for the goods until the goods are sold or until a certain period of time has elapsed.

In a consignment sale situation or a sale under a "true" return of unsold goods clause, the taxpayer is not required to recognize, for tax purposes, the income from the sale of the goods before title passes to the purchaser. Thus, where the taxpayer still reports income at the time of delivery of the goods, the CRA considers that the taxpayer can claim a reasonable deduction for goods that are returned after the end of the taxpayer's taxation year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing no profit required to be recognized on delivery of goods where a "true" return of unsold goods clause 76

26 August 2005 Internal T.I. 2005-0131171I7 F - Alinéa 18(1) e) de la LIR

no specific contractual obligation regarding maintenance obligation

A maintenance obligation to landlords did not give rise to a current deduction since no contractual obligation with specific counterparties had been entered into. The Directorate stated:

The Fédération des Caisses populaires Desjardins and Canadian Pacific Limited cases are not applicable to the circumstances of this case. In both cases, there was a party who was to receive the amounts. In the first case, the obligation was payable to employees. In the second case, the obligation was payable to the “Workmen's Compensation Board.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense no expense incurred for maintenance obligation until contractual obligation to someone 80

20 October 2004 Internal T.I. 2004-0086501I7 F - Droits compensateurs

obligation to repay suppliers for extra US countervailing duties charge made to them was contingent until a board decision reversed such duties

In 2001, the U.S. government began imposed countervailing and anti-dumping duties ("CADD") on the export of softwood lumber products from Canada, including by the Corporation, and required that the duties be paid - or that a bond be posted equivalent to such duties, which the Corporation did. Under its agreements with its lumber suppliers, the price it paid was reduced according to the applicable CADD rate that was being imposed, but it was further agreed that if the CADD was reversed, that amount would be refunded to the suppliers.

After a finding by the International Trade Tribunal that there was not a current material injury to the US lumber producers, the Corporation was released by the US government from its potential obligations regarding the CADD for the years 2001 and 2002, in 2002, it repaid an amount corresponding to the CADD in question to its suppliers.

In finding that the Corporation was not entitled to a deduction in 2001 by virtue of s. 18(1)(e), the Directorate stated:

[T]he current case differs from these two judgments [in Samuel F. Investments and Dibro Investments], in that the eventuality at issue in the present case is far from certain. For example, the possibility that the CADDs would never be paid to the relevant US government authorities was real in the year in question since, in fact, all of the CADDs at issue in 2001 were found to be inappropriate on the basis that there had been no injury to the US lumber industry.

The answer to the question concerning the deduction of adjustments to purchases from suppliers that arose in XXXXXXXXXX 2002 as a result of the ITC's decision to cancel CADDs required prior to May 16, 2002 should be consistent with the tax treatment adopted for the CADDs discussed above.

Thus, we are of the view that this expense to the Corporation's suppliers could not have been incurred prior to the ITC's decision regarding the Corporation's requirement to pay CADD on lumber.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(vv) posting of bonds for US countervailing duties did not constitute their being “paid” for s. 20(1)(vv) purposes 264

28 January 2004 External T.I. 2003-0028891E5 F - Perte sur change relative à des contrats de change

CRA position regarding recognition of accrued income account losses is subject to any application of ss. 18(1)(a) and (e)

A corporation had an accrued foreign exchange loss on foreign exchange contracts that it had entered into to hedge its food-sale operations in the US and that matured in the following year. After noting that the corporation’s recognition of such losses in accordance with GAAP and its financial statement treatment accorded with IT-346R, para. 14 and IT-95R, paras. 7 and 8, CRA went on to state that deduction of the losses nonetheless would be denied under s. 18(1)(a) if the obligation to pay under the forward contract had not yet arisen (stating that “to the extent that this obligation was not to arise until the other party to the contract had discharged its obligation (e.g., by delivery of the currency), then the expense could only be considered to have been "incurred" within the meaning of paragraph 18(1)(a) from that time” , or under s. 18(1)(e) if there was “uncertainty as to the payment of the debt.” Regarding the latter test, it stated:

In the case of a forward obligation, there is therefore certainty as to the payment of the debt, only the time of payment is deferred. It is, however, a real and enforceable debt and therefore a true obligation … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Foreign Exchange CGE established that accrued loss on FX forward contract is not a contingent liability 191

11 April 2000 Internal T.I. 2000-0001327 - INDEX LINKED GIC CONTINGENT LIABILITY

s. 18(1)(e) would prohibit the deduction by the issuer of the premium on a TSE-certified-linked GIC until the time of payment on maturity irrespective whether the issuer follows the realization method or the mark-to-market method on the call option it purchased to hedge its position.

16 July 2003 Internal T.I. 2003-0024617 F - DEDUCTIBILITE DES COTISATIONS CSST

estimated workers’ compensation premium liabilities were currently deductible
Also released under document number 2003-00246170.

The taxpayer recorded an estimate of the workers’ compensation (“CSST”) premium liabilities it had incurred in the year, which was prior to the time that the provincial commission finalized its assessment of such liability. In finding that such estimated amounts were deductible in the year, the Directorate indicated in its summary that “[a]t the end of the given taxation year, there is a legal obligation to pay the amounts and this obligation is not a contingency.”

16 February 1999 External T.I. 9900535 - RESERVES

A reserve fund for future utility costs that a water utility is required to set up pursuant to s. 57 of the Utilities Commissions Act (B.C.) does not give rise to a deductible amount when contributions are made to it.


Discussion as to whether an amount that a physician billed over the statutory cap on his billings would be deductible prior to the year of repayment.


U.S. countervailing duty cash deposits paid by Canadian lumber companies would be refundable deposits and, therefore, would represent non-deductible contingent liabilities.

18 November 1992 Memorandum 921979 (September 1993 Access Letter, p. 407, ¶C9-286)

A reserve for vacation pay benefits earned by employees in the year and that are reasonably expected to be taken in the following year does not constitute a contingent liability to pay in the future and, therefore, is deductible.

30 November 1991 Round Table (4M0462), Q. 5.1 - Acquisition of a Business (C.T.O. September 1994)

Discussion of the treatment of a purchaser that on the acquisition of a business assumes responsibility for liabilities that have not been deducted for tax purposes by the vendor.

91 CPTJ - Q.16

Although there is no provision of Part I permitting the deduction of accruals for site restoration costs, a payment to a government-mandated site restoration fund will be deductible under the Act where, for example, the payment was made pursuant to a levy by a province which itself would be responsible for the site restoration, the payment to the province is irrevocable, the payor's obligation for the site restoration was discharged contemporaneously and s. 18(1)(m) did not apply.

90 C.R. - Q14

S.18(1)(e) prohibits the deduction by a mining company on an accrual basis of future removal and site restoration costs.

19 October 89 T.I. (March 1990 Access Letter, ¶1140)

The accrual by a corporation in respect of its obligation to provide pension benefits to an employee who would retire in five years would not be a deductible expense by virtue of s. 18(1)(e).

IT-215R "Reserves, Contingent Accounts and Sinking Funds"

IT-467R "Damages, Settlements and Similar Payments"

A reserve or contingent liability for anticipated damages is not deductible.


Marie-Andrée Beaudry, Dean Kraus, "Selected Income Tax Considerations in the Court-Approved Debt Restructurings and Liquidations", 2015 Annual CTF Conference paper

CCAA Stay does not generate a s. 18(1)(e) contingency (p. 13:32)

[W]hile a stay under the CCAA stays proceedings with respect to damage claims, such a stay does not, in and of itself, render any liability for such damages contingent for the purposes of paragraph 18(l)(e). The existence of a stay impedes the ability of a creditor to enforce contractual remedies, but it does not mean that a contractual liability has not come into existence.

Hirsch, "Real Estate Issues: Traps and Opportunities", 1995 Corporate Management Tax Conference Report, c. 9

Discussion of issues respecting the allocation of common costs for which no legal liability has yet been incurred.

Holmes, "Supplemental Retirement Arrangements May Provide Deferral for Employee and Deduction for Employer", Taxation of Executive Compensation and Retirement, March 1990, p. 243

Where the amount of pension under a supplemental plan that is payable to an executive may not be ascertainable until the executive retires, it nonetheless may be known that the pension will not be less than an ascertained amount, in which event the employer may well be entitled to deduction to the extent that the pension is ascertained and the employer has an existing obligation to pay the ascertained amount.

Paragraph 18(1)(h) - Personal and living expenses


Scott v. Canada, 98 DTC 6530, [1998] 4 CTC 103 (FCA)

The taxpayer was a self-employed courier who covered approximately 150 kilometres by foot and public transportation daily in order to deliver various packages. After finding that the taxpayer was entitled to deduct the cost of extra food and water that he needed to sustain himself because of the strenuous nature of his activities, McDonald J.A. stated (at p. 6533):

"Only where there is a corresponding business deduction allowed for fuel in the form of gasoline for the same type of business will a deduction for the extra food and water a human needs to consume as its fuel be allowed. For instance, a rickshaw driver would be entitled to deduct the extra food and drink he needs to consume to do his job because his corresponding compatriot - the taxi driver - is entitled to a deduction for his gasoline."

Douglas v. The Queen, 90 DTC 6597 (FCTD)

An employee of the United Steel Workers of America who, over his objections, was placed on permanent assignment in Calgary, and maintained an apartment there in addition to the house of his family in B.C. because he was not in a position to quit the union, was unable to deduct his rental expenses from his employment income.

The Queen v. Merten, 90 DTC 6600, [1990] 2 CTC 444 (FCTD)

The taxpayer, who had management responsibilities at the main office of a construction company in Calgary, was permitted to deduct transportation expenses incurred in travelling between the temporary construction sites and his home.

The Queen v. Cork, 90 DTC 6358, [1990] 2 CTC 116 (FCA)

home office was business base

A self-employed draftsman commuted from his apartment to various sites in and around the Metropolitan Toronto area. He used a room in his apartment for preparing weekly invoices (which he sent to his placement agency), updating his resumé, typing letters to prospective employers, and making calculations and preparing sketches in connection with the current engagement.

Stone, J.A. held that because the taxpayer's home was the base or focal point for his business, his expenses incurred in travel between home and the work sites were business expenses rather than personal expenses. In addition, the Court was in agreement with the Trial Division that rent, insurance expenses and other expenses of his home office were deductible.

The Queen v. Sadavoy, 88 DTC 6065, [1988] 1 CTC 178 (FCTD)

Legal expenses incurred in order to obtain custody of children were non-deductible.

Plante v. The Queen, 83 DTC 5378, [1983] CTC 341 (FCTD)

Although the taxpayer accountant had failed to keep a mileage log it was held, primarily on the basis of the taxpayer's testimony as to the long hours he spent on the road to visit his clients, that the personal-use portion of his automobile expenses was only 20%.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 31 - Subsection 31(1) 63

Brooks v. The Queen, 78 DTC 6505, [1978] CTC 761 (FCTD)

The taxpayer sought to deduct $1,200 in respect of a portion of the mortgage interest, taxes and telephone bills for his home, on the ground that on occasion he used a room in his house to interview clients of the law firm of which he was a partner. The deduction was denied. It was noted that the room was not equipped as an office and was not assessed for business tax, and that if the expenditures were truly incurred for the purpose of generating income from the law practice, then the firm would have given him credit for them, which did not occur. [S.18(1)(a) cited.]

Randall v. Minister of National Revenue, 67 DTC 5151, [1967] CTC 236, [1967] S.C.R. 484

The taxpayer, who together with his brother was engaged in the business of managing horse racing activities in Vancouver and Portland, Oregon, was entitled to deduct the expenses of 30 trips between Vancouver and Portland, and the expenses of an hotel and apartment which he and his brother occupied and used as an office when one or the other was in Portland looking after the operation there.

Cumming v. MNR, 67 DTC 5312, [1967] CTC 462 (Ex Ct)

doctor's travel between home office and hospital was not personal

An anaesthetist rendered services to his patients at the Ottawa Civic Hospital but performed various administrative functions out of his home office which was located a short distance away, there being no office available to him at the hospital. Thurlow J. found that the home was the base of the taxpayer's practice. In finding that the expenses of travel between home and hospital were not prohibited by s. 12(1)(h) of the pre-1972 Act, he stated (at p. 5320):

"Since the appellant could not possibly live in or over the hospital so as to incur no expense whatever in getting to and from it when required and since he could not even carry out at the hospital all the activities of his practice necessary to gain or produces income therefrom it was necessary for the successful carrying on of the practice itself that he had a location of some sort somewhere off the hospital premises. This necessity of itself carried the implication that travel by him between the two points would be required ... There may no doubt be cases where a further element of personal preference for a more distant location has an appreciable effect on the amount of the expense involved in travelling between the two points but I do not think such an element is present here." [C.R: 18(1)(a) - Income-producing purpose]

See Also

Shenanigans Media Inc. v. The Queen, 2017 TCC 180 (Informal Procedure)

expenditures on actor’s clothing used in promotions were not deductible

Shenanigans Media Inc. (“Shenanigans”) was owned by Dylan Everett, an actor, who was about 14 to 16 years old during the years in issue. Assessments for the 2009, 2010 and 2011 taxation years disallowed various expenses claimed by Mr. Everett or by Shenanigans including clothing expenses claimed by Mr. Everett for his 2009 and 2010 years and by Shenanigans for its 2011 year. In confirming the denial of the deduction of these clothing expenses, Jorré J stated (at para 18, 23, 24):

Because of the inherently personal nature of clothing, it is accepted in the case law that normally clothing can only be claimed if it is not suitable for general wear or if it has special features uniquely necessary for the work. Thus, items such as period costumes, chef’s uniforms, lawyer’s gowns, jackets with company names or logos and safety related clothing are deductible. However, clothing that is generally worn is not deductible and, for this purpose, it does not matter what an individual prefers to wear when not at work. …

The receipts provided at trial showed ordinary clothes that might well be worn by anyone of Mr. Everett’s age … .

I accept that Mr. Everett had to maintain a certain image. … That does not, of itself, convert an inherently personal expense into a business expense.

Landry v. The Queen, 2014 DTC 1198 [at 3768], 2014 TCC 275 (Informal Procedure)

legal costs to cancel child support in order to receive full pension was personal expense

The taxpayer retired and began receiving pension payments, but needed a signed court order terminating child support payments for his children, who had become legal adults. Lamarre J found that the legal costs incurred in obtaining this order were personal in nature, and not deductible as a business expense.

Lavoie v. The Queen, 2014 DTC 1104 [at 3218], 2014 TCC 68

cottage used 10 days for personal use and 160 days for business was primarily for business use

The taxpayer's uncontradicted evidence was that his cottage in PEI was used approximately 170 days in a given year, only 10 of which were solely for personal use. C Miller J found that the cottage was used primarily for business purposes and, having no evidence as to how the losses were calculated, allowed them in full (para. 28).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) cottage used 10 days for personal use and 160 days for business was primarily for business use 57
Tax Topics - Income Tax Act - Section 163 - Subsection 163(2) deducting home renovations tenuously related to home office was not grossly negligent 196

Phillips v. The Queen, 2012 DTC 1278 [at 3823], 2012 TCC 337

The taxpayer was hired as an associate professor in Regina but maintained his business in Winnipeg of hosting, organizing and promoting aboriginal education conferences. The Minister denied several the taxpayer's claims for meal and travel expenses.

Bocock J. affirmed the Minister's decision to disallow the majority of the taxpayer's claimed meal expenses. The taxpayer hired his wife as a consultant, and the lion's share of meal expenses was for meals involving only the two of them. The Minister had conceded the remaining meal expenses, subject to the 50% rule.

The taxpayer's claim for travel expenses between Regina and Winnipeg was novel in that Bocock J. found that neither the taxpayer's decision to live in Regina nor his decision to keep his consulting business in Winnipeg were made for personal reasons. The taxpayer was required to live in Regina to continue his employment, but it was also necessary to keep his business in Winnipeg where the pertinent business contacts and conferences were located. Bocock J. found that he was bound by Hogg to deny travel expenses from Regina to the taxpayer's Winnipeg office, but allowed travel expenses for the purpose of chairing, supervising or hosting conferences, which he noted were located in Winnipeg "not at the personal choice of the Appellant but for the convenience of, and attractiveness to, the attendees."

Desgagné v. The Queen, 2012 DTC 1237 [at 3664], 2012 TCC 63 (Informal Procedure)

The taxpayer was a lawyer who frequently appeared in civil court, and sought to deduct, as a business expense, capital cost allowance in respect of the costs for the gowns and dark clothing she was expected to wear. Jorré J. affirmed the minister's decision to deny the deductions in respect of the dark clothing. Clothing is intrinsically a personal expense, and is only allowed in specialized circumstances where, unlike the dark clothing in the present case, the clothing cannot be worn in general at work or elsewhere (see Charron, 97 DTC 2377, [1997] T.C.J. No. 1181, where the costs of court gowns and bands were allowed).

Bruno v. The Queen, 2012 DTC 1260 [at 3762], 2012 TCC 316 (Informal Procedure)

The taxpayer employed her two teenage children part-time in her custom window coverings business. In lieu of wages, the taxpayer would purchase luxury items for her household that she would not otherwise have purchased. Woods J. noted that Symes provides that s. 18(1)(h) does not apply to an expenditure laid out for the purpose of earning income. She stated (at para. 20):

Accordingly, if a taxpayer incurs an expense for the purpose of gaining or producing income from a business, the deduction will not be prohibited pursuant to s. 18(1)(h) on the basis that it also has a personal benefit to the taxpayer.

Departing from Bradley, 2006 TCC 500 (Informal Procedure), Woods J. found that it was irrelevant that the taxpayer reserved the right to overrule her children on the luxury items purchased. She stated (at para. 23) that "I see nothing wrong with parents having a veto over expenditures made by their children."

Some of the taxpayer's purported expenses were denied, as the taxpayer's evidence was not wholly credible regarding which purchases were luxury item compensation for her children.

Bégin v. The Queen, 2012 DTC 1111 [at 3061], 2012 TCC 18 (Informal Procedure)

The taxpayer, an insurance salesman, purchased a life insurance policy on himself and several family members, seeking to earn from the sale a commission in excess of the premiums he expected to pay on the policy before cancelling.

After finding that the commissions were business income, Hogan J. went on to find that the premiums paid by the taxpayer were not deductible in the computation of such business income by virtue of s. 18(1)(h). The definition of "personal or living expenses" in s. 248(1) includes insurance premiums on policies whose proceeds are payable to the benefit of the taxpayer or a related person.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Exempt Receipts/Business commissions on personal/family policies 93

Chapman v. The Queen, 2004 DTC 3310, 2004 TCC 617 (Informal Procedure)

The theory that where one lives is a matter of personal choice and, therefore, the cost of getting to work is to a large degree affected by personal considerations was found by Woods J. not to apply where, as here, the taxpayer was commuting to temporary work assignments. All the costs of operating his motor vehicle were deductible in computing his business income from the temporary work assignments. In addition, it appeared likely that his home was the base of operations for his consulting business, so that his commuting costs likely were deductibility on that basis as well.

Fehrenbach v. MNR, 95 DTC 860, [1995] 1 CTC 2602 (TCC)

Margeson TCJ. found that the taxpayer, a partner in a law firm, had acquired a condominium in a ski area primarily as a recreational facility for himself and his family, with a view to using the condominium incidentally to promote business if the opportunity arose. The condominium expenses were not the type of expense that was generally accepted by accountants as a business expense, nor were they the type of expense normally incurred by lawyers in carrying on the practice of law. Furthermore, the expenses had not been claimed at the partnership level. Accordingly, they were non-deductible.

Sword v. MNR, 90 DTC 1798 (TCC)

An employee of a law firm, who under the conditions of her employment was required to be available by phone and whose personal use of her phone was minimal, was entitled to deduct a portion of the expenses of her apartment on the basis that she maintained a de facto office.

Parikh v. Sleeman, [1990] BTC 142 (C.A.)

The taxpayer carried on his professional activities as a general medical practitioner at his surgery and, when necessary, at his private residence. In addition, he was employed part-time at three hospitals. His hours of work allowed time for travelling from his home or surgery to the hospitals.

The special commissioners were entitled to infer, as a question of fact, that the taxpayer, when travelling from home or surgery to the hospitals was not travelling in the performance of his duties.

MacKinlay v. Arthur Young McClelland Moores & Co., [1989] BTC 587 (HL)

The policy of a firm of accountants was to reimburse its partners for various costs of their moving their residence from one city to another at the request of the executive partnership committee. Lord Oliver stated:

"... It is inescapable as it seems to me, that the expenditure, motivated no doubt by the fact of moving house, which in turn was motivated by the desire to put the partner concerned in a better position to further the interests of the firm, was an expenditure serving and necessarily and inherently intended to serve the personal interests of the partner in establishing his private residence for himself and his family and it cannot be said to be exclusively for the purposes of the partnership practice."

Gurney v. Richards, [1989] BTC 326 (Ch.D.)

A Deputy Chief Fire Officer, who used a car provided to him by the Fire Office which was fitted with Fire Service equipment for travelling between his home and his office or other stations was found not to be travelling in the performance of the duties of his employment. Although he was required to be available for duty when at home or travelling (and in fact attended 10 or 11 incidents from his home during the year) this did not establish that the travelling done by him was in the actual performance of his duties.

Mallalieu v. Drummond, [1983] BTC 380, [1983] 2 All E.R. 1095 (HL)

A self-employed person who maintains a wardrobe of everyday clothes which are reserved for work and commuting to and from work derives some personal benefit from those clothes. Her clothing expenses accordingly are not "wholly and exclusively laid out or expended for the purposes of the trade" within the meaning of s. 130 of the Income and Corporation Taxes Act 1970, and are non-deductible.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) 27

White v. MNR, 60 DTC 113 (TAB)

The annual cost to a taxpayer of maintaining a residential telephone was not deductible on computing his income notwithstanding that his residential telephone number was listed in the Toronto telephone directory entry for his firm name along with the firm's downtown telephone number and notwithstanding business use of the telephone. Mr. Fordham noted that any one of the taxpayer's earning capacity would have a residential telephone in any event but added (at p. 114) that if the taxpayer "had had an additional telephone at his residence under a separate and professional listing and paid for it as being a business telephone, it may well be that this matter would have been viewed differently".

Administrative Policy

15 November 2012 Internal T.I. 2012-0459321I7 F - Biens locatifs - frais de déplacement

notwithstanding the s. 18(1)(h) postamable limitation to business income, there is a circumscribed deduction for travel to and from single rental property

Can a taxpayer owning two adjacent rental duplexes generating property income deduct the travel expenses incurred to travel from the taxpayer’s principal residence to those rental properties? After citing Benjamin, 54 DTC 357 and stating “the courts have made it clear that rental income is not usually business income and therefore cannot fall within the exception in paragraph 18(1)(h) for travel expenses,” CRA stated that “we do not consider that the taxpayer complies with the requirement that the two rental properties be located in two different locations from where the taxpayer's principal residence is located.” Consequently, the taxpayer could access only the following administrative policy:

Where a taxpayer owns only one rental property, the taxpayer may deduct motor vehicle expenses if the following conditions are satisfied:

  • The taxpayer receives income from a single rental property located in the area where the taxpayer lives;
  • The taxpayer personally does part, or all, of the necessary repairs and maintenance on the rental property;
  • The taxpayer incurred motor vehicle expenses to transport tools and materials to the rental property.

…[S]uch a taxpayer cannot deduct the motor vehicle expenses incurred to collect rents.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose deductibility of travel expenses to manage rental properties partly turns on whether single or multiple locations 219

22 October 2012 External T.I. 2012-0452491E5 F - Repas fournis dans le cadre d'une formation

deductibility of meal portion of training charges may be denied under s. 18(1)(h)

As part of the carrying on of its training business, the taxpayer provides breakfast and dinner, as well as a coffee break. Respecting the deductibility of the “meal” portion of the charges to the trainees, CRA stated:

Paragraph 18(1)(h) explicitly precludes the deduction of personal or living expenses of the taxpayer in the calculation of the taxpayer’s business income … . According to [IT -357R2, para. 5] … any portion of a claim by a participant in respect of training expenses which either is personal or is unreasonable in the circumstances is not deductible by virtue of paragraph 18(1)(h) or section 67, respectively.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(a) Pink Elephant followed/potential exception for training business where it breaks out meals on its invoices 212
Tax Topics - Income Tax Act - Section 67.1 - Subsection 67.1(1) trainees required to break out meal portion of their invoices even if not separately identified 86
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Know-How and Training training expenses deductible (subject to s. 67.1(1)) provided that no new skill or qualification is acquired 149

13 February 2012 External T.I. 2011-0426471E5 - Travel Expenses

travel expenses incurred by a business owner to return home from vacation to respond to a business emergency would not be deductible given that such expenses would not qualify as being incurred while away from home in the course of carrying on a business.

9 June 2011 External T.I. 2011-0393331E5 F - Frais de déplacement - principal lieu d'affaires

travel between home office used for back office and 20% of client meetings and other office was personal

A part-time self-employed professional has a home office where she makes and confirms appointments with clients, writes consultation notes, keeps client records, pays bills, carries out accounting and holds 20% of her meetings with clients, and also rents a small office (without access to a photocopier, fax machine or printer) in another area of the city where she meets with clients the other 80% of the time. In finding that her expenses of driving between her home and other office were not deductible by virtue of s. 18(1)(h), CRA indicated that in view of 80% of the meetings being in the other office, that it likely was her principal place of business, and stated:

[P]aragraph 18(1)(h) explicitly precludes the deduction of personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business. …

[T]he use of a motor vehicle for personal purposes generally includes travel between a taxpayer's home and the taxpayer’s place of business, unless it can be shown that the taxpayer’s principal place of business is the taxpayer’s home.

21 September 2010 Internal T.I. 2010-0377011I7 F - Dépenses de vêtements - travailleur indépendant

no deduction to self-employed welder for work boots and fire-resistant clothing

In finding that the cost to a self-employed welder of purchasing steel-toed work boots and fire-resistant clothing could not be deducted in computing his business income, CRA stated:

[W]here a taxpayer acquires clothing that can be used in both the taxpayer's business and personal activities … the expense is a personal or living expense that is not deductible by reason of paragraph 18(1)(h).

…Our position might be different if these boots and clothing were used by the self-employed worker only in the course of performing the worker’s welding activities.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) no CCA for clothing (e.g., work boots) that were not used only in the individual’s business 108

12 June 2009 Internal T.I. 2009-0324511I7 F - Déductibilité des primes payées

premiums paid by broker on policies on which the insureds were family members were non-deductible notwithstanding that the related commissions earned by him were taxable

A self-employed financial products broker receives commissions for the sale of life insurance policies that he takes out for his own benefit (the persons insured are members of his family and the beneficiaries are either him or his spouse). The broker is responsible for the payment of the related premiums. Are these premiums deductible in computing his income from a business? After finding that the commissions generated by the broker were income to him given their substantial amount, CRA stated:

[T]he insured persons being members of the broker's family, CRA is of the view that such premiums are a personal expense that is not deductible under paragraph 18(1)(h).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit substantial commissions generated to broker on policies where he paid the premiums were taxable given their substantial amount 208

11 July 2008 External T.I. 2008-0271941E5 F - Frais de déplacement-principal lieu d'affaires

use of their homes for voyage planning did not render pilots’ homes their principal place of business

Marine pilots carry on their pilotage business through a partnership whose office is used only by administrative staff. The pilots receive their assignments by telephone at their homes, from where they carry out some of the preparatory work for the navigational activities, including preparing their passage plan, and updating of navigational notices, sounding reports and nautical charts, as well as the verification of tides and water levels.

Before finding that travel expenses incurred by them between their homes and the boarding station were likely non-deductible by virtue of s. 18(1)(h), CRA referred to the criteria in IT-514R, para. 2 as to what is a contractor's principal place of business, stated that “the jurisprudence defines a taxpayer's principal place of business as the place where secretarial activities are carried out, where financial statements and income tax returns are prepared, where communication with clients, suppliers, accountants, lawyers or government authorities takes place, and finally, where the company's mail is sent,” and then concluded:

[W]e cannot conclude that a pilot's home is the pilot’s principal place of business and, consequently, the expenses incurred by the pilot between the pilot’s home and the port of embarkation are personal expenses that are not deductible ... .

4 July 2007 Internal T.I. 2007-0237631I7 F - Frais de repas - Secteur du taxi

ss. 18(1)(h) and (a) less restrictive than s. 8(4) but does not permit deduction of self-employed tax driver’s lunch expenses

Regarding a self-employed taxi driver working at a fixed locale in the Montreal area, who picked up clients during working hours and incurred meal expenses for lunch, the Directorate stated:

[T]ravelling expenses are expenses incurred in travelling from one place to another and include food and accommodation. The phrase "while away from home" excludes travel between a residence and a place of employment. That passage is less restrictive than the one used in subsection 8(4)… .

… Paragraph 18(1)(h) does not impose any minimum distance or duration requirements regarding the deductibility of a meal. …

[M]eal expenses incurred by a self-employed person in respect of meals consumed alone at lunchtime are generally not expenses incurred by the self-employed person in the course of carrying on the person’s business and for the purpose of earning income from the business.

16 January 2007 External T.I. 2006-0217641E5 F - Dépenses de vêtements - travailleur indépendant

clothing expenses of personal stylist are non-deductible

A self-employed person who runs a business as a personal consultant and stylist, and provides advice on wardrobe reorganization, selection, alteration and recycling of clothing and coordination of clothing and purchase recommendations incurs significant costs for clothing, hairdressing and dry cleaning in order to present herself well. CRA stated:

[T]he costs of clothing and related cleaning costs of a self-employed person carrying on a business as a consultant and personal stylist are personal expenses that are not deductible from the taxpayer's business income since the clothing may be used otherwise than in the course of carrying on the business. These expenses are also not eligible for capital cost allowance. Similarly, hairdressing expenses incurred by the taxpayer are not deductible since the taxpayer incurs them in order to report for work … .

10 August 2006 Internal T.I. 2006-0191571I7 F - Frais de déplacement - biens locatifs

two adjacent properties nonetheless are separate so that related property-management travel expenses are deductible

A taxpayer owns two adjacent rental properties 100 km from the taxpayer’s principal residence. Are these considered as two properties for purposes of CRA’s policies on s. 18(1)(h). The Directorate responded:

[T]he CRA … allows a taxpayer who owns two or more rental properties that are located in two or more locations other than the taxpayer's principal residence to deduct reasonable travel expenses incurred in collecting rents, supervising repairs, and managing the property.

Generally, we consider that a taxpayer who owns a single rental property is not carrying on a business and, as a result, the taxpayer’s travel expenses are considered personal and therefore not deductible. … Benjamin … 54 DTC 357 … determined that travel expenses incurred by a taxpayer to attend to rental properties are personal expenses of the taxpayer.

The CRA does, however, provide relief for a taxpayer's reasonable motor vehicle expenses incurred by the taxpayer to transport tools and materials to a rental property to perform all or part of the repair or maintenance work on the taxpayer’s rental property, provided that the property is located in the taxpayer's home area. … It should be noted that this policy does not provide relief for travel expenses to collect rents if the taxpayer has only one rental property and is not carrying on a business.

[Here] we may consider the properties to be in two different locations despite their proximity to each other as the collection of rent, the supervision of repairs and the general management of those properties may require separate one-off trips.

16 May 2006 External T.I. 2005-0155251E5 F - Dépenses de vêtements - travailleur indépendant

CCA cannot be claimed for suits of business person

Before concluding that a self-employed minister could not claim CCA for or deduct the cost of his suits and ties, CRA stated:

Where a taxpayer acquires clothing that can be used both in the taxpayer's business activities and in the taxpayer's personal activities, such as a suit as in this case, the CRA takes the position that such expense is a personal or living expense that is not deductible by virtue of paragraph 18(1)(h).

6 April 2006 External T.I. 2005-0157461E5 F - Frais de déplacement - actionnaire

expenses of corporate investor to attend shareholders’ meeting were non-deductible

In finding that airfare and hotel expenses incurred by an investment company to attend a general meeting of shareholders in connection with one of its share investments were non-deductible, CRA stated:

[T]he travel and living expenses incurred are not deductible to the corporation on the basis that, in our view, the expenses incurred by a shareholder of a corporation in attending the annual meeting constitute personal and living expenses within the meaning of paragraph 18(1)(h).

26 October 2005 External T.I. 2005-0117551E5 F - État des loyers de biens immeubles

prohibition applied to travel and accommodation expenses incurred in dealing with a rental property left in substandard condition

In finding that travel and accommodation costs incurred by the taxpayer in dealing with a rental property at a distant location that had been left in an unsanitary and substandard condition by a deceased tenant were non-deductible, CRA stated:

[U]nless you incurred those expenses for the purpose of earning income from a business or property, you will not be able to deduct those expenses from your rental income for the 2004 taxation year.

… [I]t would appear that your travel expenses were incurred to monitor and manage the situation arising from the death of your tenant and not to earn income from the property.

In addition, because of the clear prohibition in paragraph 18(1)(h) … you cannot deduct in computing your rental income the meal and living expenses that you incurred while staying in Longueuil, as those are personal and living expenses.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense costs of disinfecting, de-odourizing and repairing a rental home were currently deductible 86

28 February 2005 External T.I. 2004-0108551E5 - Disability Insurance Through a Professional Assoc.

"Where an insurance policy, including one purchased through a professional association, provides the self-employed taxpayer with a benefit for loss of income earning capacity, such as income disability insurance, it is our view that the premium paid on such a policy is a personal and living expense which is non-deductible. However, benefits received by the taxpayer under such a plan would generally not be included in income for tax purposes."

17 February 2005 External T.I. 2004-0104731E5 - Disability Income Insurance

"Where a Policy, purchased directly from an insurance company or indirectly through a professional association, provides an Individual, carrying on a business or practicing a profession, with a benefit for loss of income-earning capacity, the premium paid on such a Policy by the Individual is a personal or living expense that is not deductible for income tax purposes. Additionally, the receipt of disability benefits under the Policy will not be included in computing the individual's business income."

30 November 2004 External T.I. 2004-0090181E5 F - Assurance maladie grave

premiums paid by corporation for critical illness policy of which it is beneficiary are non-deductible pursuant to s. 18(1)(h)

A corporation purchases a critical illness insurance policy on the life of its sole shareholder and there is also, at an additional cost, a rider to the policy providing for a refund of the premiums paid if the shareholder does not develop one of the covered illnesses or medical conditions after a 10-year period. Regarding the non-deductibility of premiums, CRA stated:

Under subsection 248(1), personal or living expenses include premiums or other charges for an insurance policy if the proceeds of the policy are payable to or for the benefit of the taxpayer.

Generally, premiums paid by a corporation for critical illness insurance in the above situations are not deductible in computing the corporation's income.

Furthermore, where the corporation is the beneficiary of a policy acquired to finance a share purchase/redemption under a shareholders' agreement … the premiums are not made or incurred for the purpose of earning business income as required by paragraph 18(1)(a) or paragraph 18(1)(h).

Similarly, if the purpose of acquiring an insurance policy is to compensate the corporation for the additional costs or loss of income that might be incurred in the event of an employee or shareholder suffering from a critical illness … the premiums are not incurred or made for the purpose of earning business income as required by paragraph 18(1)(a) or because they are personal or living expenses by virtue of paragraph 18(1)(h).

If a critical illness policy were used as collateral for a corporate loan, the premiums would also be non-deductible …. Antoine Guertin … .

… Premiums paid by the corporation for the rider to the policy allowing it to obtain a premium refund amount if the shareholder does not have one of the covered illnesses or medical conditions after 10 years are not deductible on the basis of the application of paragraphs 18(1)(a) and 18(1)(h).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(a) - Subparagraph 39(1)(a)(iii) no capital gain on receipt by corporation of benefit under a critical illness insurance policy or of refund of premiums 174
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) misallocation shareholder benefit could arise if corporation pays premiums for its critical illness policy and sole shareholder pays for rider entitling him to premium refunds 285
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose premiums paid by corporation for critical illness policy of which it is beneficiary are non-deductible per s. 18(1)(a) or (h) 173

24 September 2004 External T.I. 2004-0055421E5 F - Frais de déplacement

a hospital could be a place of work if a regular work schedule there, even if no dedicated office there

A self-employed radiologist, who does not have a permanent office at Hospital A (80 kilometres from his home) but an office and an X-ray room are available to him when working there, but Hospital B (75 kilometres from his home) provides him with an office for his exclusive use. In addition to a regular work schedule at both hospitals, he is periodically on call, which requires him to rent a hotel room or apartment near the hospital where he is on call.

CRA indicated that Hospital B should be considered a place of business of the radiologist having regard to its policy that travel between a place of work and home is non-deductible, stating in this regard that:

[I]n some cases, such as that of health professionals, it may be sufficient for an individual to have access to certain premises on a continuous basis to carry on the individual’s business and for it to be common knowledge that the individual can be reached at such location when the individual’s services are required, in order to conclude that it is the individual’s place of business.

Regarding Hospital A, it stated:

The fact that a radiologist does not have a permanent work office at that hospital may serve as an indication but is not, in our view, a conclusive criterion … . [O]ne could conclude that Hospital A is a place of business for the radiologist since … the radiologist has a regular work schedule at both hospitals. In such a case, travel between his residence and his place of business would be considered to be of a personal nature.

The rental costs were non-deductible.

4 May 2004 Internal T.I. 2004-0060871I7 F - Frais de coaching

coaching expenses of self-employed person were personal

In finding that costs incurred by a self-employed person for coaching services were not deductible by virtue of s. 18(1)(h) in computing income from a business in the insurance field, CRA stated:

[I]t appears to us that a personal development aspect underlies the entire coaching process. Furthermore, the information available in this file does not demonstrate that those expenses were incurred for the taxpayer's business needs.

22 September 1998 Memorandum 982320

The Scott case is restrictively interpreted. "Only where a taxpayer's business involves non-motorized locomotion will a business deduction be allowed for 'food and beverages' as an alternative fuel source."

23 June 1994 External T.I. 9403465 - SEMINAR EXPENSES

The amount in respect of a four-day seminar held during a 12-day European cruise for self-employed professionals will be deductible to the extent that it does not exceed the amount that would have been incurred if the seminar had been held in the usual manner in the locale where the participants normally attended such seminar.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 67 57

15 February 1993 External T.I. 9334215 F - Travel Expenses - Rental Property

RC is prepared to allow the deduction of reasonable motor vehicle expenses incurred by an individual who owns only one rental property where the rental property is located in her general area, she does part or all of the necessary repairs and maintenance on the property, and she incurs the expenses to transport tools and materials to the property. The first of these conditions will not be satisfied if it takes approximately 25 minutes to travel from her rural home to the rental property, where it is apparent that other towns are closer to her residence.

4 May 1992 TI 920636

Premiums paid by a partnership under a disability plan to insure against the loss of income earning capacity of its partners would not be deductible by virtue of s. 18(1)(h).

3 April 1992 T.I. 9206128 (May 1993 Access Letter, p. 191, ¶C9-264)

Amounts paid for the services of a call girl are not deductible.

27 September 1991 T.I. (Tax Window, No. 10, p. 20, ¶1488)

If an employee is not entitled to claim expenses for an office in the home, travel between home and the first customer of the day is considered to be personal.

6 March 1991 Memorandum (Tax Window, No. 1, p. 15, ¶1146)

Notwithstanding the Hoedel case, RC does not accept that travel between the taxpayer's home and place of work is other than primarily personal in nature.


Income Tax Technical News, : Comment on Scott case.

Paragraph 18(1)(l) - Use of recreational facilities and club dues

See Also

Hewlett-Packard (Canada) Co. v. Canada, 2005 DTC 976, 2005 TCC 398

The costs incurred by the taxpayer in providing free accommodation as a reward to employees at various large resort hotels (such as the Deerhurst Resort) did not have their deduction prohibited by s. 18(1)(l). Woods J. stated (at p. 978) that:

"I do not think that most Canadians would describe large hotels with a range of modern amenities as 'lodges'."

Words and Phrases

Administrative Policy

7 January 2013 External T.I. 2012-0460021E5 F - Remboursement de cotisations à un club

denial applies to fitness centre fees, irrespective of benefit to employer

Respecting where paramedics are reimbursed by their employer for the cost of membership fees in a fitness centre, CRA stated:

Under paragraph 18(1)(l), the payment or reimbursement of such expenses does not give entitlement to a deduction in computing the employer's income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) where “membership in a fitness centre allows the employee to meet … specific conditions [of employment,” the test of “more than 50% … to the employer's advantage” may be met 180

Income Tax Technical News, No. 12 under "Meals and Beverages at Golf Clubs"

"A 'facility' will not include the dining room, banquet halls, conference rooms, beverage rooms or lounges of a golf club and, thus, the deduction of the cost of meals and beverages incurred at a golf club will not be denied under the provisions of subparagraph 18(l)(i)."

17 November 1993 Income Tax Severed Letter 9330166 - Membership Fees

Discussion of the meaning of the phrase "membership fees ... in any club the main purpose of which is to provide dining, recreational or sporting facilities for its members".

21 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 22)

Interest on money borrowed to acquire a yacht used to entertain clients for business purposes is non-deductible in light of s. 18(1)(l)(i). However, a reasonble fee paid to have a corporate name appear on a racing yacht may be deductible if the expenditure can be expected to enhance, improve or maintain the corporation's income.

7 March 1990 T.I. (August 1990 Access Letter, ¶1367)

Where a corporation acquires a ski pass valid for 36 visits at an arm's length ski resort, the visits may be made by any individual designated by the corporation and the corporation plans to provide the pass to its principal clients, s. 18(1)(l) will not restrict the deduction of the cost of the pass.

2 March 1990 T.I. (August 1990 Access Letter, ¶1367)

Where the taxpayer had acquired a golf pass valid for a number of rounds on a golf course, the expenditure was non-deductible by virtue of s. 18(1)(l) regardless whether or not the purpose of the expenditure was public relations.

Subparagraph 18(1)(l)(i)


The Queen v. Sie-Mac Pipeline Contractors Ltd., 92 DTC 6461 (FCA)

use qua mere licensee

Expenses incurred by the taxpayer in entertaining clients at a remote B.C. fishing lodge, including room, food, transportation, fishing licences, alcohol and tobacco, were non-deductible. Linden J.A. noted that "there is no need for the property to be 'owned' or 'rented' or 'exclusively controlled' in order for it to be 'used', as that word is employed here" (p. 6462).

Words and Phrases

The Queen v. C.I.P. Inc., 88 DTC 6005, [1988] 1 CTC 32 (FCTD)

A couple acquired a tugboat, converted it to use as their residence, and used it for fishing charter purposes for 4 to 6 weeks a year, including a charter to the taxpayer for business promotion purposes. Since the vessel's primary use was as a residence rather than as a pleasure craft, it was not a "yacht".

Words and Phrases

The Queen v. Jaddco Anderson Ltd., 84 DTC 6135, [1984] CTC 137 (FCA)

The deduction of sums paid for the rental of a fishing lodge that was used by the taxpayer for the entertainment of some of its business clients was prohibited by s. 18(1)(l)(i).

See Also

Fehrenbach v. MNR, 95 DTC 860, [1995] 1 CTC 2602 (TCC)

A condominium of the taxpayer in a ski area was not a "lodge" given that it was a four-seasons residence or home which was occupied as such by him and his family periodically, and on other occasions was made available to others at no cost to them. The dictionary meaning of "lodge" was very broad, and it could not be imagined that the legislators had intended that the subparagraph applied to every conceivable abode.

Administrative Policy

13 May 2016 External T.I. 2016-0635601E5 F - Dépenses de commandite

general overview of deductibility limitations re sponsorship expenses

CRA provided a general response to an inquiry as to the deductibility of sponsorship expenses incurred in favour of a golf club, referencing both the general limitations in ss. 18(1)(a) and 67, and the specific limitations in ss. 18(1)(l)(i) and 67.1(1).

1 March 2013 External T.I. 2013-0477911E5 - Expenses to host employees and spouses at a resort

A taxpayer intends to offer employees and their spouses an all-expenses-paid week-long trip to a resort located outside of North America, in which they will participate in various team building sessions and sessions related to improving their understanding of the taxpayer's business. The resort also provides recreational activities typical of a vacation resort. CRA indicated that the resort is not a "lodge," based on the conclusions reached in Hewlett-Packard.

22 January 2010 Internal T.I. 2009-0346971I7 F - Événement ayant lieu dans un club de golf

“facility” does not include a golf club's dining room, reception rooms, conference rooms, lounges or bar

At a golf day organized for all its employees, the company pays for the green fees, the rental of golf equipment, and the food (shown separately on the invoice) provided to the employees. After noting that the s. 67.1(2)(f) exception applied only for purposes of s. 67.1(1), and did not override the prohibition in s. 18(1)(l), CRA went on to state:

In 1998, the Canada Revenue Agency amended its policy … . Consequently, a facility does not include a golf club's dining room, reception rooms, conference rooms, lounges or bar so that the deduction of expenses incurred for the purchase of food and beverages at a golf club is no longer prohibited by subparagraph 18(1)(l)(i).

Thus, assuming that the expense in respect of the food provided to all employees on the golf day is made for the purpose of earning business income, is reasonable in the circumstances and is one of six or fewer special events held in the year by the business, the exception in paragraph 67.1(2)(f) would apply.

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(f) 67.1(2)(f) exclusion can apply to meals provided at a golf club 232


General discussion of RC's "fair and liberal interpretation" of the provision.

21 November 1994 External T.I. 9424395 - USE OF A LODGE

Where property of a type described in s. 18(1)(l)(i) is used for business purposes (which do not include the entertainment or recreation of clients, suppliers, shareholders or employees), the related expenses, provided they are reasonable, will fall within s. 18(1)(l).

A "lodge" for this purpose means an inn or resort hotel, particularly one that is a centre for recreational activities, as well as a dwelling occupied on a seasonal basis in connection with particular activities, such as hunting or fishing.

2 August 1994 Internal T.I. 4-941841

Following its review of the Sie Mac case (93 D.T.C 5158), RC has determined that it will continue to follow the policy on the deduction of expenses for genuine business meetings held in resort hotels described at the 1984 Canadian Foundation Conference. No deductions will be available in situations like the Sie Mac case where there may be some business meetings involved, but the main activity is recreation.

6 June 1994 External T.I. 9328785 F - Meaning of Lodge

The word "lodge" means "an inn or resort hotel, particularly one that is a centre for recreational activities, as well [as] a dwelling occupied on a seasonal basis in connection with particular activities, such as hunting or fishing".

Words and Phrases

29 August 1991 T.I. (Tax Window, No. 8, p. 19, ¶1426)

Incidental income from a property to which s. 18(1)(l)(i) applies may be offset by the non-deductible costs. A similar offset applies where the income from the rental of the property exceeds the maintenance costs.

84 C.R. - Q.15

Where a "lodge" (including an inn or resort hotel) is used for a genuine business purpose (not including the entertainment of clients, suppliers, shareholders or employees) RC will not consider the deduction of related reasonable expenses to be prohibited.

Subparagraph 18(1)(l)(ii)

Administrative Policy

6 August 2002 Internal T.I. 2002-0130897 F - RECOMPENSES ES QUASI-MONETAIRES

s. 18(1)(l)(ii) applies irrespective whether the membership is an employer gift within the ITTN 25 gifts policy

Would an employer who makes gifts to its employees of the purchase of a membership to a recreation or sports club in reliance on CCRA’s new policy in Income Tax Technical News No. 22 regarding gifts and awards given by an employer to employees be able to deduct such purchases in computing its business income? CCRA responded:

Subparagraph 18(1)(l)(ii) applies to the expense regardless of whether the health club membership is a gift covered by the new policy on gifts made by employers or a taxable benefit under section 6. Such an expense will therefore not be deductible to the employer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) gift cards and smart cards with spendable balances do not come within the ITTN 25 gifts policy 86
Tax Topics - Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(d) s. 67.1(2)(d) exclusion inapplicable to meal or show ticket gifts within ITTN 25 gifts policy 97

Paragraph 18(1)(m) - Limitation re employee stock option expenses


Mobil Oil Canada Ltd. v. Canada, 2001 DTC 5668, 2001 FCA 333

Under the Road Allowances Crown Oil Act (Alberta), 1.88% of producing oil reservoirs of the taxpayer was deemed to be property of the Alberta Crown; and the taxpayer was accorded the right to sell its entire oil production from the reservoirs, including the Province's 1.88% share, upon paying the Province 1% of the total value of the production.

In finding that such payments were "royalties", Sharlow J.A. stated (at p. 5673) that:

"The word 'royalty' is still used in Canada to describe a payment that is required by a provincial statute to be paid to the province as a share of the production of a resource"

She also rejected a submission that s. 18(1)(m)(v) imposed any condition as to the ownership of the oil with respect to which the payments were made. Accordingly, s. 18(1)(m) prohibited the deduction of the 1% payments.

Words and Phrases

Utah Mines Ltd. v. The Queen, 92 DTC 6194, [1992] 1 CTC 306 (FCA)

The taxpayer, which was a U.S. corporation with a mining operation in B.C., was prohibited by s. 18(1)(m) from deducting royalties payable by it to the Province of B.C. notwithstanding the provisions of the 1942 Canada-U.S. Income Tax Convention which provided that in determining the net industrial and commercial profits of a permanent establishment there shall be allowed as deductions all expenses reasonably allocable to the permanent establishment. Hugessen J.A. stated (p. 6197):

"The interpretation proposed by the appellant ... would have the effect of giving a U.S. taxpayer with a permanent establishment in Canada a more favourable tax treatment than its Canadian competitor engaged in the same business in this country. Such a result would not be in accordance with the policy expressed in the preamble to the Convention ..."

Gibralter Mines Ltd. v. The Queen, 85 DTC 5085, [1985] 1 CTC 116 (FCTD)

Provincial royalties which are determined on an annual basis should also be determined for the purposes of s. 18(1)(m) on an annual basis. The effect of a decline in copper and silver prices after May 6, 1974 (the effective date of s. 18(1)(m)) was to reduce the portion of B.C. mining royalties paid in the taxpayer's 1974 taxation year that otherwise would have been attributable to the stub period prior to May 6, 1974 due to the sensitivity of the royalties, determined on an annual basis, to price levels.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing income determined annually 34

See Also

Potash Corporation of Saskatchewan Inc. v. The Queen, 2022 TCC 75

sales of potash “related to” potash production

The taxpayer, which produced and sold potash from mines in Saskatchewan, was subject to both a profit tax and to the making of “base payments” under the Mineral Taxation Act, 1983 (Saskatchewan). In finding that the base payments made in its 1999 to 2002 taxation years did not satisfy the requirement under s. 18(1)(a) of having been incurred for the purpose of producing income from the taxpayer’s business, Owen J applied the principle that since an income tax is imposed on the profits generated by a business rather than being incurred to generate those profits, it cannot satisfy this purpose test. Although the base payments in fact were computed in substantial part based on potash sales made in the year, he indicated that such sales had been chosen “as a proxy for income to ensure that a minimum amount of tax would be collected in respect of such potash even if the producer did not have profits for the year” (para. 72).

Owen J went on to find that deduction of the base payments was also denied for those taxation years by former s. 18(1)(m), which relevantly applied if they could "reasonably be regarded as being in relation to” the acquisition, development or ownership of a Canadian resource property, or the production in Canada to any stage that is not beyond the prime metal stage or its equivalent of minerals from a mineral resource located in Canada. After noting (at para. 79) that the base payment “is a tax on the producer selling or otherwise disposing of its potash,” he stated (at para. 86):

[A] “sale or other disposition of” potash is an activity that relates to the production of that potash. There is a direct and immediate connection between the production of potash and the subsequent sale or disposition of that potash.

Words and Phrases
in relation to relates to
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose deductibility of Saskatchewan potash tax “base payments” denied given that sales they were applied to were a proxy for income 357

Cogema Resources Inc. v. The Queen, 2004 DTC 3674, 2005 TCC 750

Deduction of a resources surcharge paid by the taxpayer to the Saskatchewan government, equal to 3.6% of the value of resource sales made by it, was not prohibited by s. 18(1)(m) as the surcharge related to the taxpayer's actual sales of minerals and not to its right to remove the minerals from the ground.

Hamilton v. The Queen, 97 DTC 787, [1997] 1 CTC 2446 (TCC)

In finding that annual provincial coal licence fees paid by the taxpayer in respect of a licence held by a corporation of which he was a shareholder did not qualify it for a deduction, McArthur TCJ. quoted from The Queen v. Gulf Canada Ltd., 92 DTC 6123 at 6128 (FCA) and stated (at p. 790) that "from this passage it is clear that paragraph 18(1)(m) is applicable to licence payments as well as lease payments made for the purpose of development or ownership of an interest in a mineral property".

Administrative Policy

29 March 1994 External T.I. 9333335 - CROWN ROYALTY ON FARMOUT PROPERTY

Re application of s. 18(1)(m)(v) to oil production from farm-out wells; and potential application of s. 80.2.

28 March 1991 Memorandum (Tax Window, No. 1, p. 21, ¶1141)

The Saskatchewan Resource Surcharge is computed with reference to production and therefore is a non-deductible Crown charge.

89 C.P.T.J. - Q6

The Saskatchewan capital tax surcharge (based on 2% of gross resource revenue) is a tax computed by reference to the value of production, and therefore is non-deductible.

89 C.P.T.J. - Q7

Compensatory royalties payable by a crown lessee under the Alberta Mines and Minerals Act are in relation to the lessee's ownership of Canadian resource property, and are of the type described in s. 18(1)(m).

Paragraph 18(1)(p) - Limitation re personal services business expenses

Administrative Policy

19 January 1993 T.I. (Tax Window, No. 28, p. 17, ¶2372)

A corporation that carries on a personnel services business is entitled pursuant to s. 18(1)(p)(ii) to deduct the amount of a retiring allowance paid to an incorporated employee provided that the retiring allowance will be deductible on computing its income if its income were from a business other than a personnel services business. S.18(1)(p) also does not deny the deduction of contributions made by the corporation to a registered pension plan in respect of the incorporated employee otherwise deductible under s. 20(1)(q).

Subparagraph 18(1)(p)(ii)

Administrative Policy

9 March 2020 External T.I. 2013-0490301E5 F - Société exploitant une EPSP

PSB can deduct for auto leasing costs or loan interest expense to extent of benefit conferred on the individual qua employee rather than shareholder – but no CCA deduction (other than under s. 18(1)(p)(iii))

Is a corporation carrying on a personal services business ("PSB") entitled to deduct the following under s. 18(1)(p)(ii): (i) the costs of leasing an automobile provided to an incorporated employee; (ii) interest expense on a loan for the purchase of such automobile; and (iii) capital cost allowance thereon? CRA responded:

[T]here is a benefit to an incorporated employee for purposes of subparagraph 18(1)(p)(ii) where a corporation carrying on a PSB leases an automobile that is used by the incorporated employee, in whole or in part, for personal use.

If this benefit is provided to the incorporated employee in the incorporated employee’s capacity as an employee … the cost of the benefit comprises the personal use portion of the automobile lease costs. Consequently, these expenses would be deductible in computing the income of the PSB corporation by virtue of subparagraph 18(1)(p)(ii) to the extent that such leasing costs would otherwise be deductible if the corporation's income were from a business other than a PSB. …

If this benefit is provided to the incorporated employee in the incorporated employee’s capacity as a shareholder, the cost of the benefit is not deductible in computing the income of the PSB corporation … since it would not, if the corporation's income were from a business other than a PSB, be deductible in computing its income.

CRA went on to provide that a similar analysis applied to the interest expense, i.e., if the related benefit was provided to the incorporated employee qua employee, the cost of the benefit comprised the portion of the interest expense relating to the personal use of the automobile, which amount would be deductible in computing the PSB corporation’s income under s. 18(1)(p)(ii) to the extent that such interest expense would otherwise be deductible if the corporation's income were from a business other than a PSB – whereas, in the qua shareholder case, none of the interest expense would be deductible.

Respecting CCA claims, CRA stated:

[A] capital cost allowance amount is not the cost of a benefit …[and] is not deductible in computing the income of a PSB corporation under subparagraph 18(1)(p)(ii). … However … capital cost allowance may be deducted in computing the income of the PSB corporation by virtue of subparagraph 18(1)(p)(iii) where such an amount would otherwise have been deductible by virtue of paragraphs 8(1)(f) and 8(1)(j)(ii), having regard to subsections 8(4), 8(10) and 8(13) … .

Words and Phrases

18 September 2012 External T.I. 2011-0423941E5 F - Entreprise de prestation de services personnels

cost of benefit to corp generally equals allowance amount and can be the cost of a non-s. 6 benefit – however no benefit if cell phone used primarily in course of employment
  1. What is meant by "the cost of … any benefit or allowance," and does this differ from the amount of the benefit conferred on the employee?
  2. Re 2004-0098531E5, does "any benefit or allowance" reference both taxable and non-taxable benefits and allowances?
  3. Is the cost of a cellular phone provided by a personal services business (PSB) to an employee and used 60% for employment purposes deductible?

CRA responded:

Under subparagraph 18(1)(p)(ii), the amount deductible to a corporation carrying on a PSB will be what it cost to provide the benefit to the employee. For an allowance, this will usually be the amount of the allowance paid to the employee. …

[A] corporation carrying on a PSB … would not be able to deduct the cost associated with a motor vehicle made available to an incorporated employee.

In the case of an operating expense benefit, it is our view that a corporation carrying on a PSB could deduct the amount of such expenses that it pays and that are included in the calculation respecting the employee. …

[A] corporation carrying on a PSB may deduct the costs of benefits and allowances conferred on an incorporated employee without being limited to the benefits and allowances referred to in paragraphs 6(1)(a) and 6(1)(b). …

In the case of a cellular telephone that is provided by a PSB corporation to an incorporated employee, there will be no benefit to the employee if the employee uses the telephone primarily for the purpose of the employee’s employment. Since there is no benefit conferred on the employee, the employer correlatively will not be entitled to a deduction.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) no taxable benefit if cell phone used primarily in employment 52

Subparagraph 18(1)(p)(iii)

Administrative Policy

7 October 2011 Roundtable, 2011-0411891C6 F - Dépenses- EPSP - négociant en vente

s. 18(1)(p)(iii) deduction limited to commission income

Must a corporation carrying on a personal services business (PSB) of selling property or negotiating contracts receive commissions from which the expenses under subparagraph 18(1)(p)(iii) will be deductible or can it deduct its expenses without receiving commissions?

After referencing the s. 8(1)(f) limitation, that the deduction thereunder cannot exceed the commissions or other similar amounts received by the employee in the year and that a corporation carrying on a PSB is subject to the same limitation, CRA stated:

In other words, if in the course of a taxation year a corporation carrying on a PSB did not receive any commission or other similar compensation in the course of carrying on its business of selling property or negotiating of contracts, it cannot deduct any amount spent by it that is related to the selling of property or the negotiation of contracts during that taxation year.

CRA went on to indicate that the range of potentially deductible expenses under s. 18(1)(p)(iii) was as discussed in relation to an employee in Guide T4044.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 8 - Subsection 8(13) home office of a PSP corporation’s employee could qualify 84

Paragraph 18(1)(r) - Certain automobile expenses

Administrative Policy

27 April 1990 T.I. (September 1990 Access Letter, ¶1410)

Where a consulting firm reimburses the travelling expenses of its employees and charges the travelling expenses on an itemized bill sent to its clients, the corporation and not the clients will be governed by the restrictions of s. 18(1)(r).

Paragraph 18(1)(t) - Payments under different acts


Doulis v. The Queen, 2014 DTC 1054 [at 2933], 2014 TCC 26 (Informal Procedure)

tax arrears interest is not a business expense

Lamarre J dismissed the taxpayer's arguments that he should be able to deduct interest on tax arrears as a business expense. Such deductions were prohibited by s. 18(1)(t).

In any event, the interest payments would not have been deductible under s. 20(1)(c). There was no borrower-lender relationship with the Crown as CRA did not agree to lend money to the taxpayer and the taxpayer instead owed tax under the Act, and there was no contractual agreement between the two parties (paras. 13-14).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) tax arrears interest is not a business expense 86
Tax Topics - Income Tax Act - Section 9 - Interest Income tax arrears interest is not a business expense 86

Administrative Policy

Example 5

In 2013, X Corp. fails to collect tax levied under the Tobacco Tax Act of Ontario. Interest and penalties are imposed under subsections 18.1(1) and 19(2) of that Act, respectively.

The penalty imposed under subsection 19(2)…cannot be deducted.

…[T]he interest is not precluded from deduction by paragraph 18(1)(t). Such interest may be deducted where it was made or incurred by X Corp. for the purpose of gaining or producing income from the business or property and otherwise meets the requirements for deduction under the Act.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 87 - Subsection 87(4) 206

Provincial income tax


Paragraph 18(1)(t) does not prohibit the deduction of provincial income tax. However, provincial income tax is not an expense made or incurred by a taxpayer for the purpose of gaining or producing income from a business or property and is therefore precluded from deduction by paragraph 18(1)(a). This position is consistent with the Exchequer Court of Canada's decision in Clinton W. Roenisch v. MNR , [1931] Ex. C.R. 1, 1 DTC 199….

Foreign income or profits tax

Paragraph 18(1)(t) does not prohibit a deduction for income or profits tax paid or payable to a foreign jurisdiction. However, a foreign income or profits tax is not an expense made or incurred by a taxpayer for the purpose of gaining or producing income from a business or property and is therefore precluded from deduction by paragraph 18(1)(a). This position is consistent with the Exchequer Court of Canada's decision in Quemont Mining Corporation v. MNR , [1966] CTC 570, 66 DTC 5376.


An exception to the general limitation in paragraph 18(1)(a) applies to the deduction of certain foreign taxes under subsections 20(11), (12) and (12.1).

19 June 2003 Internal T.I. 2003-0021297 F - LOI SUR L'ACCISE PENALITES INTERETS

GST/HST interest and penalties are deductible based on application of ordinary principles
Also released under document number 2003-00212970.

Regarding the deductibility of interest and penalties arising under the ITA and ETA, the Directorate indicated that deductibility of the former was prohibited by s. 18(1)(t), whereas this prohibition did not extend to the latter so that, for instance, GST/HST interest generally was deductible if incurred re deductible expenditure.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose GST/HST interest deductible if incurred re deductible expenditure/ penalties may also be deductible 166

Paragraph 18(1)(u) - Fees — individual saving plans


Wickham Estate v. The Queen, 2015 DTC 10125 [at 102], 2014 TCC 352 (Informal Procedure)

pro rata denial based on portfolio portion invested in RRIF

Fees paid by the taxpayer otherwise would have been fully deductible under s. 20(1)(bb). However, as about 20% of her portfolio was in a RRIF, deduction of 20% of the fee was denied under s. 18(1)(u). See detailed summary under s. 20(1)(bb).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Oversight or Investment Management pro rata denial based on portfolio portion invested in RRIF 71
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) payments to (otherwise) retired investment manager deductible 271