This week, we realized that U.S. President Donald Trump paid solely US$750 in federal revenue taxes for 2016 and 2017, and no private revenue taxes by any means in 10 of the final 15 years. However the revelation that he deducted US$70,000 for the price of his haircuts and hairstyling for showing on The Apprentice has some taxpayers scratching their heads questioning whether or not private grooming, together with a wide range of different private bills, can ever be legitimately tax deductible.
The Revenue Tax Act imposes very strict guidelines on the subject of the deductibility of enterprise bills. It states that “no deduction shall be made in respect of an outlay or expense besides to the extent that it was made or incurred by the taxpayer for the aim of gaining or producing revenue from the enterprise.” Moreover, it particularly states that “private or dwelling bills of the taxpayer, aside from journey bills incurred by the taxpayer whereas away from residence in the middle of carrying on the taxpayer’s enterprise” aren’t deductible.
In different phrases, so as to make a profitable enterprise expense declare for what might in any other case seem like a private expense, like grooming, the taxpayer should have the ability to exhibit that the expense was primarily associated to incomes enterprise revenue.
The difficulty of whether or not haircuts and private grooming can ever be tax deductible has come up a number of occasions over time in Canadian tax legislation. For instance, in 1993, the Canada Income Company was requested whether or not “navy regulation model haircuts” (presumably for members serving within the navy) may very well be a deductible expense for revenue tax functions. The CRA responded negatively, “since haircuts are thought of private care prices that aren’t deductible beneath the Act.”
Extra just lately, the problem of grooming arose in a
2017 tax case involving a teen TV actor from Degrassi
who tried to assert practically $7,300 for make-up and hair bills. The decide discovered that grooming was of an “inherently private nature,” including that “many individuals, whether or not they’re workers or are self-employed, really feel that they should keep a sure picture each at work and in lots of public areas.… That doesn’t, of itself, convert an inherently private expense right into a enterprise expense.” The decide was ready to permit 50 per cent of the actor’s grooming bills, which the decide discovered to be “greater than cheap.”
However it’s not simply haircuts and private grooming bills that may catch the ire of the tax man. Relatively, any time a person makes an attempt to deduct what in any other case would possibly appear to be a private expense, the CRA might wish to have a more in-depth look. Take, for instance, a latest tax case determined simply final month.
The case concerned a 76-year-old Ontario geologist who labored within the useful resource extraction trade as a prospector, entrepreneur and inventor. He testified that in his 2011 taxation yr (and for a while earlier than and after 2011), he labored on a wide range of entrepreneurial initiatives which have been “excessive danger and excessive hypothesis.”
He proceeded to deduct $20,156 of enterprise bills for the 2011 tax yr that have been disallowed by the CRA. He argued the bills claimed have been reputable enterprise bills associated to his enterprise actions as a geologist, prospector and inventor throughout that yr, that they have been incurred for the aim of gaining or producing revenue from these enterprise actions, and that they weren’t associated to private or dwelling bills. The CRA disagreed and the dispute landed in Tax Courtroom.
The taxpayer produced 13 pages of spreadsheets setting out roughly 390 separate expense gadgets, listed in chronological order offering particulars of the quantity paid, merchandise paid for, location, share claimed as enterprise expense, and a file reference quantity.
At trial, the taxpayer conceded that a number of the listed bills “have a private use element” and offered an estimated share of enterprise utilization as follows: clothes (10 per cent), residence bills (15 per cent), line of credit score curiosity (10 per cent), Web (60 per cent), hydro (15 per cent), cellphone line No. 1 (80 per cent), cellphone line No. 2 (30 per cent), cellphone (95 per cent), vehicle (30 per cent), and leisure (50 per cent).
The decide reviewed the bills, allowed lots of them, however had particular issues about a number of of them. The decide questioned the auto bills, which the taxpayer testified associated 30 per cent to enterprise use. The decide famous that since nearly the entire taxpayer’s business-related journey was out of province which might have required air transportation and, since no logbook of any variety was saved by the taxpayer to determine what quantity of the space pushed in his automobile was for private vs. enterprise use, these bills can’t be correctly tax deductible.
Turning to the curiosity paid on his line of credit score, the decide felt that there was inadequate proof to assist a 10 per cent allocation of this expense for enterprise functions, so it was denied. As for the clothes expense, the decide rejected a flat 10 per cent allocation of every little thing the taxpayer spent on clothes as attributable to his work. “If there may be any clothes that’s mandatory for this type of work, then that particular merchandise of clothes or tools must be claimed as a enterprise expense reasonably than arbitrarily claiming a share of the whole spent on clothes,” the decide remarked.
Lastly, the decide didn’t assume it was cheap to have three completely different telephones that have been used for each private and enterprise use. Because the taxpayer’s enterprise actions have been principally performed away from residence all through Canada, it was cheap that he would use his cellphone for enterprise functions, to the exclusion of the opposite two telephones, the bills of which the decide denied.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Property Planning with CIBC Personal Wealth Administration in Toronto.