Business

1
Business Property Income Deductions
2
Business Property Income Deductions

• The concept of profit
• s. 9 - the general rule
• Ss 10 37 the details
• Profit
• Profit (Income) Revenues - Expenses
• Income Tax Act Rules
• Generally Accepted Accounting Principles

3
Business and Property Deductions

• Section 18 Imposes specific limitations on
  expenses that can be claimed
• S. 18(1)(a) incurred to gain or produce income
• S. 18(1)(b) no deduction for capital outlays
• S. 18(1)(h) no deductions for personal or living
  expenses
• Section 20 notwithstanding section 18, allows
  for certain deductions (ie Capital Cost Allowance)

4
Why not Capital Expenditures?

• In first year of business, 100,000 expense for a
  building and revenues of 50,000
• PR-E P50K-100K 50K
• Second year in business, only 20,000 in
  operating expenses, revenues of 80,000
• PR-E P80K-20K 60K
• Is this business an overnight success?

5
Rules on deductibility

• Imperial Oil (1947)
• Is the cost of paying damages an expense incurred
  to gain or produce income?

6
Rules on deductibility

• Imperial Oil (1947)
• Is the cost of paying damages an expense incurred
  to gain or produce income?
• Royal Trust (1957)
• Are social club dues (ie golf club memberships)
  deductible business expenses?
• S. 18(1)(l) reverses Royal Trust

7
Personal Living Expenses

• Benton (1952)
• Is the cost of a housekeeper a deductible
  business expense?

8
Personal Living Expenses

• Benton (1952)
• Is the cost of a housekeeper a deductible
  business expense?
• Symes (1993)
• Are child care expenses deductible business
  expenses?

9
Personal Living Expenses

• Benton (1952)
• Is the cost of a housekeeper a deductible
  business expense?
• Symes (1993)
• Are child care expenses deductible business
  expenses?
• Leduc (2005)
• Are criminal defence costs deductible business
  expenses?

10
Personal Living Expenses

• Scott (1998)
• Can food and water be a deductible business
  expense?
• Cummings (1967)
• When, if ever, is the cost of getting to and from
  work a deductible business expense?

11
Home Office Expense

• Section 18(12) deals with workspace in the home
  and restricts the deduction. The expense must be
  otherwise deductible.
• S. 18(12)(a) must be principal place of business.
• S. 18(12)(b) may not use home office expense to
  create a loss.

12
Home Office Expense

• Business revenue 10,000
• Expenses 7,000
• Home office 5,000
• Income or Loss 2,000
• BUT cannot create loss with home office
• Business revenue 10,000
• Expenses 7,000
• Home office 3,000
• Income or Loss 0

13
Entertainment Meals

• Entertainment and meals always include a personal
  element
• Statutory limit on personal element
• S. 67 - reasonable amounts
• S. 67.1 only 50 of cost of food and
  entertainment is deductible
• Roebuck (1961, T.A.B.)

14
Public Policy Considerations

• S. 9 18 establish general boundaries for the
  deductibility of business and property expenses
• Nothing in either of them about public policy
  i.e. about disallowing an expense for public
  policy reasons

15
Public Policy Considerations

• Am I taxable on the income I make from selling
  homemade beer?
• What are the policy arguments for or against
  taxing me?
• If taxable, are the costs of the kegs, hops,
  sugar, spring water and bottles deductible?
• Eldridge (1964, Ex.Ct.)

16
Fines and PenaltiesAssume income of 100,000 and
a 10,000 fine

• 1. Fine not deductible
• Taxable income 100,000
• Tax -50,000
• After tax 50,000
• Pay fine -10,000
• Profit 40,000
• Fine is paid in after-tax

• 2. Fine deductible
• Income 100,000
• Pay fine -10,000
• Taxable income 90,000
• Tax -45,000
• Profit 45,000
• Fine is paid in pre-tax

17
Fines Penalties

• It would be preposterous if the appellant
  company was allowed to deduct a fine and
  therefore share equally with the public treasury
  the loss for which it was condemned by its
  unlawful act.
• Luscoe (1957, Ex.Ct.)

18
Fines Penalties

• 65302 B.C.Ltd (2000, SCC)

19
Fines Penalties

• 65302 B.C.Ltd (2000, SCC)
• Prohibited deductions s. 67.5

20
Fines Penalties

• 65302 B.C.Ltd (2000, SCC)
• Prohibited deductions s. 67.5
• Theft, burglary, embezzlement

21
Fines Penalties

• 65302 B.C.Ltd (2000, SCC)
• Prohibited deductions s. 67.5
• Theft, burglary, embezzlement
• S.67.5 amended

22
Deductibility of Interest

• Borrowing to produce business or property
  income
• S. 20(1)(c)
• Money used in the business or used to purchase an
  asset
• Amount of interest must be reasonable

23
Deductibility of Interest

• What happens when original use ceases?
• Tennant (1996, SCC)
• S. 20.1

24
Deductibility of Interest

• What happens when original use ceases?
• Tennant (1996, SCC)
• S. 20.1
• Direct or indirect use of borrowed funds
• Bronfman (1987, SCC)

25
Deductibility of Interest

• What happens when original use ceases?
• Tennant (1996, SCC)
• S. 20.1
• Direct or indirect use of borrowed funds
• Bronfman (1987, SCC)
• Attaie (1990, Fed.C.A.)

26
Deductibility of Interest

• What happens when original use ceases?
• Tennant (1996, SCC)
• S. 20.1
• Direct or indirect use of borrowed funds
• Bronfman (1987, SCC)
• Attaie (1990, Fed.C.A.)
• Ludco Enterprises (2001, SCC)

27
Reasonableness

• S. 67 does not prohibit deduction, but operates
  to reduce it to a reasonable amount
• Mulder Bros. (1967, T.A.B.)

28
Reasonableness

• S. 67 does not prohibit deduction, but operates
  to reduce it to a reasonable amount
• Mulder Bros. (1967, T.A.B.)
• No. 511 (1954, T.A.B.)