Business Deduction: Shareholder Travel to Time-Share in Mexico and Basic Internet and Cable at Home Office
1259066 Ontario Limited v The Queen, 2012 TCC 399
At issue was whether the shareholder of the company could charge to the company (as business expenses) part of the travel to a time-share owned by the shareholder in Mexico as a “corporate retreat” and the cost of basic cable and internet to the home of the shareholder which is also the office of the corporation.
The Court did not believe that the primary purpose of the trips to Mexico were primarily business as the taxpayer had been taking the same type of trip prior to starting this business (trip was a lifestyle choice despite some business activity) and the business activity could have been conducted elsewhere. With respect to the internet and cable, the court held that the taxpayer failed to disprove the Minister’s assumption, and failed to prove a higher business use percentage.
The Court referred to the applicable provisions in the ITA, including subsection 15(1) [shareholder benefit], 18(1) [General limitations on expense deduction], 20(1) [deductions permitted in computing income from business or property], and 248(1) definitions of “personal and living expenses”.
The court noted that to be deductible an expense has to be incurred for purpose of gaining or producing income from a business in which the taxpayer is engaged, and that “personal and living expenses” cannot be deducted pursuant to paragraph 18(1)(h). However, 18(1)(h) did not capture travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business. To determine the purpose of an expense, the court said that one must look at the predominant reason for incurring the expense.
The court had a hart time believing that the travel to Mexico was primarily for business reasons, as the taxpayer has been going to mexico regularly well before his business venture began. Though the taxpayer did carry on some business activity while there, this could have been done from elsewhere, and the trip was a lifestyle decision made by the taxpayer. The Court also noted that the taxpayer billed the corporation not for the actual cost of the trip, but the value of the trip, but did not deal with the reasonableness of the expenses.
The basic internet and cable expenses were denied since it was impossible to determine the percentage of personal use versus business use. The Court held that the MNR approach was reasonable, and the burden was on the taxpayer to prove a higher business use percentage. The Court referred to the 24/7 availability of these services to the taxpayer and his spouse. [NOTE: If these services were required for the business, and no charges other than the basic charges were incurred, why would this not be deductible fully to the business despite the potential or actual personal use – see analogy to cellphone benefits to employees where the basic free is not exceeded – IT- ????]