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
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
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.