Don't let taxman join your foursome: Ottawa targets golfers: Green fees can't be deducted but 50% allowed on meals
2004-06-19 National Post
The legendary U.S. humourist Will Rogers once quipped that the income tax system has made more liars out of people than golf. Unfortunately, there is a more ominous link between golf and taxes.
With the onset of summer, executives will begin heading out to the links to conduct business or to strengthen business relationships. But, golfers beware: given the harsh tax treatment of golf fees in Canada, it can prove to be a very expensive way to entertain clients.
One of the basic tenets of Canadian tax law is that you can deduct legitimate business expenses incurred for the purpose of earning income from your business as long as the expenses are reasonable and are not considered personal or living expenses.
The Income Tax Act limits the deductibility of legitimate business expenses that would otherwise be allowed. An example is the restriction that only 50% of the cost of business meals or entertainment is tax deductible. This limitation recognizes the fact that some level of personal enjoyment is inherent in the meal being consumed or the entertainment being enjoyed. Golf, however, has its own set of rules.
Under the Tax Act, green fees as well as golf club membership dues are not deductible, even if incurred as a legitimate business expense. What, you may ask, does the taxman have against golf and why has it been singled out for such harsh treatment, distinct from other forms of business entertainment?
The tax policy underlying this restriction can be traced back to the 1969 Benson Report, which contained proposals for the major tax reform of 1972. In fact, the report called for an end to the deductibility of all entertainment expenses, regardless of whether there was a legitimate business purpose for the entertainment.
In particular, it was felt that due to the recreational nature of certain expenses, the direct business purpose associated with, say, a game of golf, was "inevitably accessory" to the recreational and personal nature of the golf game.
After various consultations, however, the government compromised and concluded that while legitimate business entertainment expenses would still be tax deductible, there would be certain exceptions, among them, golf, which would no longer be deductible.
The government has stated that the limitation on golf expense deductibility is "designed to ensure that businesses assume their fair share of the tax burden, and to prevent ordinary taxpayers from subsidizing the deduction by businesses of entertainment expenses that are altogether discretionary."
What about other business entertainment expenses at a golf course, such as meals or drinks? About 10 years ago, Ottawa created an uproar by announcing that any expenses incurred for food and beverages at a restaurant, dining room, lounge, banquet hall or conference room of a golf club "in conjunction with a game of golf" were also not deductible.
The government's position was based on a 1993 Supreme Court of Canada decision wherein the court determined that all of a taxpayer's expenses of entertaining customers at a fishing lodge were not deductible, since a parallel rule restricting the deductibility of lodge expenses also exists.
According to the SCC, both food and transportation incurred at or to the fishing lodge were not deductible, since the deduction of such expenses was "the very kind of thing the [rule] was meant to stop."
This position threatened to lead to absurd results wherein a taxpayer who played a round of golf with clients and invited them to dinner that evening in the club's dining room could not deduct the cost of the food; however, if they left the golf course and chose to dine at a restaurant across the street from the club, 50% would be deductible.
After numerous objections from the golfing and business community, the CRA abandoned its position and currently will allow a 50% deduction for any meals and beverages consumed in the various eating facilities of the club if incurred as a legitimate business expense.
To ensure proper deductibility, you should ensure that any meal and beverage expenses are clearly itemized and segregated from other pure golf-related expenditures, such as green fees and golf cart rentals.
So, while taking clients golfing may indeed make good business sense, the restriction on the deductibility of such an expense may cause you to think twice before inviting the taxman to join your next foursome.
GRAPHIC: Black & White Photo: Kaz Novak, The Canadian Press; The 18th hole and the clubhouse of the Hamilton Golf and Country Club in Hamilton, Ont. While expenses directly related to playing are not deductible, 50% of meals and beverage costs can be deducted.
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