Fiscal information

Did you know that, in certain situations, you can deduct entertainment expenses incurred outside Canada if they were incurred for the purpose of earning business income?

The “BERTRAND HÉBERT & CITADELLE CHEVROLET CADILLAC BUICK GMC LTÉE vs. AGENCE DU REVENU DU QUÉBEC” decision of March 28, 2024 reminds us that certain expenses that might at first glance appear to be of a personal nature incurred outside Canada are deductible if they were incurred to earn business income and are properly documented to link the expense to the business income.

The decision reiterates the basic principle that expenses must be incurred for the purpose of generating business income to be deductible.

Mr. Hébert testifies that, at the start of his career, he thought about a strategy that would enable him not only to sell cars, but also to build customer loyalty, so that sales could, if possible, become recurrent, or customers could recommend him to family members or friends, so that they in turn could buy a vehicle from Citadelle. He declares that he figured out his sales strategy of networking through the sport and social activity of golf early on.

In 2014, when he decided to move with his wife to Florida for six months of the year, golf remained a working tool for him. He chose to purchase a condominium unit located on the edge of a world-renowned golf course.

At this time, he was still president of the company. He says he was always very active in representation activities. He says he needed to continue to boost sales at his car dealerships. Mr. Hébert says he works remotely from Florida. He explains that one of the condominium’s rooms has been converted into an office. It contains all the equipment needed to get him up and running, such as a computer, printer, and telephone, and to work remotely.

On his return to Quebec, he handed the accountant proof of the expenses he incurred while in Florida, so that they can be recorded as deductible expenses, since they were incurred for the purpose of selling motor vehicles, and thus earning business income. At the hearing, he produced an inventory of vehicles purchased by people he had met in Florida during his visits.

In principle, any expense incurred for the purpose of earning business or property income is tax deductible under section 128 of the Income Tax Act, provided the expense is reasonable.

When the expense concerns an amount paid for the consumption of food or beverages, section 421.1 ITA limits the deductible amount (the 50% rule), subject to the exceptions set out in section 421.2 ITA.

At the hearing, Mr. Hébert provided a table entitled “Comparative table of Bertrand Hébert’s guests at his golf games and restaurant dinners in Florida and Quebec”. In examining this table, the Tribunal noted that the majority of these people were those with whom Mr. Hébert associated both on golf courses in Quebec and in Florida. He noted that golf expenses involving these individuals are accepted within the meaning of section 128 ITA when incurred in Quebec.

The decision deals with expenses incurred by Mr. Hébert with the Citadelle credit card, including:

Mr. Hébert’s meal taken alone in Quebec;

The Tribunal considers that these meals taken alone in the Quebec City area between two meetings must be considered personal within the meaning of the Act, as Mr. Hébert has not provided any evidence that would allow the Tribunal to review the Agency’s decision in this regard.

– Meals with third parties in Florida;

The Tribunal also notes from the evidence that Mr. Hébert concluded new business deals with Quebecers he met in Florida. Upon their return to Quebec, they purchased a motor vehicle from one of Mr. Hébert’s dealerships. This shows that solicitation, no matter where it takes place, can represent a sale in Quebec, to the benefit of the company.

The Tribunal is of the opinion that the evidence establishes that Mr. Hébert and Citadelle succeeded in overturning the presumption of validity of the notices of assessment at issue.

Expenses related to food and drink consumed in Florida are granted in a percentage of 60% as a personal expense and 40% as a business expense.

Golf expenses in Florida;

Expenses related to golf in Florida will be granted at 50%, as this is the percentage eligible under the ITA.

Hotel stay in Florida;

Expenses related to food and drink consumed in Florida are granted in a percentage of 60% as a personal expense and 40% as a business expense.

Florida highway fastpass (SunPass) and vehicle roadside assistance (OnStar and Sirius XM);

The roadside assistance tool can be considered a work tool, helping drivers to find their way when visiting customers or prospects, whether in Quebec or Florida. However, it can also be used for personal outings in both Quebec and Florida. Under the circumstances, this expense is also granted in a percentage of 60% as a personal expense and 40% as a business expense.

The same will be true for the “fast pass” in Florida.

The cost of a subscription to the Sirius XM music service is considered a purely personal expense.

Show tickets in Florida: Céline Dion show.

The Tribunal considers this to be a representation expense (50%).

Discussion

We recommend that you read this decision carefully to understand its context and particularities before applying its conclusions. This decision demonstrates the importance of being able to justify expenses that might at first glance appear to be of a personal nature, which are deducted in order to earn business income.

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Did you know that, in certain situations, you can deduct entertainment expenses incurred outside Canada if they were incurred for the purpose of earning business income?