With the limits for social gatherings being loosened, wedding season is back.
If you’re looking for a way to reduce your out-of-pocket costs of hosting a wedding reception, you may be tempted to write off part of the cost as a business expense for tax purposes, perhaps by inviting some work colleagues or customers.
But, as a recent case shows, attempting to write off your wedding as a business expense could land you in serious hot water with the taxman. And it goes well beyond being reassessed and charged with penalties and interest: You could even face jail time. Before delving into the facts of this case, let’s review the rules governing the deductibility of expenses and the consequences if you’re caught.
One of the most alluring benefits of being self-employed or running a business is the ability to write off a variety of business expenses for tax purposes. Under the Income Tax Act, an individual is permitted to deduct legitimate business expenses incurred for the purpose of earning income. The expenses must also be “reasonable.” There is also a specific prohibition against deducting “personal or living expenses incurred by a taxpayer,” unless you’re travelling away from home for the purpose of earning business income.
But if you push the envelope of expense deductibility, either by claiming questionable expenses with little business purpose or by overstating the amount of your expenses, you could see your tax deduction for the suspect expenses be denied and end up on the hook for tax owing and arrears interest.
Then, on top of that, you could be assessed a gross negligence penalty as well.
In fact, in the most egregious cases, if the Canada Revenue Agency feels that you “willfully, in any manner, evaded or attempted to evade compliance with (the) Act or payment of taxes,” you can be charged criminally under the Income Tax Act and be fined anywhere from 50 per cent to 200 per cent of the tax that was sought to be evaded, plus you could face a prison term of up to two years.
And those are exactly the stakes that were on the line in the recent tax evasion case involving a wedding.
The case was an appeal from a lower court decision in which the judge convicted the Toronto-area taxpayer and the company he owned of willfully evading taxes by making false statements on personal and corporate income tax returns.
While much of the original trial dealt with costs associated with the building of the taxpayer’s residence, which was written off as a business expense, the trial judge ultimately acquitted the taxpayers of all counts relating to those building expenses. A second part of the trial, however, had to do with costs associated with the wedding of the taxpayer’s son in Montreal.
The company is a “closely held family-run corporation” in the manufacturing business. It employed two bookkeepers and hired a certified accountant to oversee their work. Several family members, including the son, were also employees of the company.
In 2011, the taxpayer’s son got married at a hotel in Montreal with nearly 400 guests. The taxpayer’s corporation paid and claimed tax deductions for well over $60,000 of wedding-related expenses. These included invoices for the reception, bus transportation from Toronto to Montreal, accommodations and breakfasts for participants and guests.
The taxpayer’s accountant attended the wedding and provided evidence about whether business associates of the company attended. In examination, the accountant testified that he did not know the guests at the wedding, but he was “led to believe that there were many business associates” in attendance.
The CRA investigator testified that he had interviewed two persons who attended the wedding and asked what their purpose was for attending and whether there was any talk of business at the event. The two told him it was just to attend the wedding. The investigator testified that he understood that customers of the company had been invited, but he could not pin down how many had shown up or what business was conducted to make it a business event.
The trial judge acknowledged that allowable business deductions was a “broad category that permitted businesses to deduct social events and entertaining, even wedding receptions, provided that the expenses were reasonable and done for the purpose of obtaining or producing income for the business.”
Nevertheless, the trial judge convicted the taxpayer and his company of tax evasion, finding that the wedding-related expenses were personal expenses illegally claimed by the taxpayer as business expenses and that the taxpayer made the claim knowing them to be personal expenses.
The judge wrote, “As an experienced businessman, (he) knew he was overstepping when he claimed this amount of the wedding expenses as a business expense.” She based her ruling largely on her assessment that “there was …no actual evidence that any customers, or potential clients were invited to the wedding.”
The taxpayer appealed this decision to the Ontario Superior Court of Justice, which heard the case in May and released its decision earlier this month. In the appeal, the taxpayer argued that when the judge found no evidence that business associates attended the wedding, this represented “a serious misapprehension of or a failure to appreciate the evidence,” as it seemed to contradict the accountant’s evidence.
A misapprehension of evidence includes a failure to consider relevant evidence, a mistake about the substance of evidence and a failure to give proper effect to evidence.
The appellate court judge agreed and felt that this misapprehension of the evidence “tainted the trial judge’s reasoning process.” As the appeal judge wrote, “From the mistaken finding that no business associates were invited to or attended the wedding, the leap to the finding of guilt was not far and was easily made.”
No business expenses could rightfully be claimed if no one that did business with the (taxpayers) was invited to or attended the wedding. The conviction based upon this misapprehension of the evidence was not a true verdict based exclusively on the evidence. The (taxpayers) did not receive a fair trial and were the victims of a miscarriage of justice.”
The judge ordered a new trial to be held.