CRA, courts clamp down on write-offs for personal travel

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One of many advantages usually cited by small-business homeowners is the power to write down off numerous bills for tax functions. The misperception about what may be legitimately written off brings to thoughts considered one of my favorite Seinfeld episodes, The Bundle, during which Kramer convinces Jerry to say his stereo was damaged throughout transport to gather a $400 insurance coverage cost from the put up workplace.

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Kramer: “Jerry, all these massive firms, they write off all the things.”
Jerry: “You don’t even know what a write-off is.”
Kramer: “Do you?”
Jerry: “No, I don’t.”
Kramer: “However they do, and so they’re those writing it off.”

The issue with write-offs is that to ensure that a enterprise expense to be correctly deductible for tax functions, it have to be legitimately incurred for the aim of incomes revenue. In any other case, the Canada Revenue Agency can deny the deduction in addition to assess an worker or shareholder profit, leading to double taxation. As soon as, as a result of the expense is disallowed as a deduction, and a second time when the worth of the profit turns into taxable to the shareholder or worker.

That’s precisely what occurred in a Federal Courtroom of Enchantment case determined earlier this month.

The case concerned 4 siblings in Ontario who function a big dairy farm enterprise that manufactures quite a lot of merchandise, together with cheese and yogurt, which can be offered all through North America. The enterprise is integrated, and every sibling is a shareholder and an worker of the enterprise.

For the Dec. 31, 2015, taxation yr, the CRA reassessed the corporation to disallow practically $500,000 of enterprise bills. Of those bills, practically $355,000 of them associated to journey bills (together with meals). As well as, the CRA reassessed every of the siblings to incorporate numerous quantities referring to the non-deductible journey of their revenue that it deemed private, saying every of them had obtained both a shareholder or employment profit.

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The quantities have been important. One sibling, the president, was reassessed to incorporate $211,621 in his revenue for 2014 and $156,696 for 2015 as shareholder advantages, which represented a part of the denied journey bills paid by the company for himself, his spouse and his mom. Equally, one other sibling, who acted as treasurer and director of human assets, needed to embrace $237,647 and $181,737, respectively, as shareholder advantages. The third sibling’s shareholder advantages totalled practically $27,000 over the 2 years underneath assessment, whereas the fourth’s have been virtually $50,000.

In tax courtroom, the taxpayers stated all journey bills paid by the corporate have been incurred for the aim of gaining or producing enterprise revenue, resembling assembly suppliers worldwide or growing the corporate’s enterprise market. They stated the journey bills “weren’t of a private nature” and mustn’t have been included within the computation of their revenue. In addition they argued that shareholder advantages shouldn’t apply to 2 of the 4 siblings since they solely owned most well-liked shares within the firm, not widespread shares.

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The CRA disagreed, saying that the disallowed journey bills weren’t incurred by the corporate for the aim of gaining or producing revenue from a enterprise.

In the course of the preliminary trial, the corporate’s monetary controller testified, however her testimony was “obscure and inconsistent.” Because the choose stated: “Since she was assigned to cope with the audit, it’s not credible that, as (the company’s) monetary controller, she didn’t know which bills have been private and which bills have been business-related.”

The corporate president’s testimony was additionally discovered to not be credible. He said that each one disallowed journey bills paid by the corporate have been incurred for enterprise functions, however he was unable to supply any cheap clarification nor any documentary proof to justify the deductibility of the journey bills by the company.

Among the many whole journey bills deducted by the corporate, the CRA auditor was ready to permit roughly $200,000 of journey bills with out every other supporting paperwork aside from credit-card statements for journeys to Dubai for an annual commerce present, and journeys to Chicago, New York, Vancouver, San Diego and Washington.

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Different journey bills for journeys to Paris, Aruba, Nassau and Mont-Tremblant weren’t allowed, nor have been bills paid to Sunwing Holidays, because the auditor concluded these have been private bills paid by the company for the good thing about the siblings and numerous different relations.

Different disallowed journey bills included: credit-card expenses incurred in Sint Maarten, together with numerous restaurant meals; bills on the Fairmont Tremblant in Quebec, Ritz-Carlton in Aruba and Ritz-Carlton in Grand Cayman; and a few bills incurred by a sibling’s partner at Holt Renfrew in Montreal.

To justify any of the disallowed journey bills, the choose stated “it will have been cheap to anticipate that some supporting documentation — specifically emails, invites to conferences, agendas of conferences, and so forth. — would have been adduced on the listening to indicating the needs of the varied journey bills.”

With out such proof or documentation, the choose concluded the bills have been merely not deductible and the non-public bills have been included in every of the sibling’s incomes as both shareholder or worker advantages.

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The siblings and company appealed the decrease courtroom determination, and a brand new trial was held on the Federal Courtroom of Enchantment on June 17, 2024. In a brief, six-page determination delivered orally from the bench, the three-judge panel of the appellate courtroom unanimously upheld the decrease courtroom’s determination.

The panel stated the tax courtroom choose correctly weighed the proof earlier than her, noting the “whole absence of documentary proof” to again up the taxpayers’ claims that bills have been incurred for the aim of incomes enterprise revenue.

The panel additionally addressed the argument of two siblings who held solely most well-liked shares and felt they may not be assessed as shareholders on this case. The panel famous, nonetheless, that the Tax Act “doesn’t make a distinction between widespread shareholders and most well-liked shareholders” when assessing shareholder advantages.

Because of this, “There’s … regardless of right here to intervene,” the panel stated.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com.

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