Tax law takes nine-iron to golf deductions

National Post

2011-05-14


It has been said that taxes and golf are very similar — you drive your heart out for the green, and then end up in the hole. And that’s exactly where you could end up if you try to deduct those green fees.

Generally speaking, you can deduct legitimate business expenses incurred for the purpose of earning income provided the expenses are reasonable and are not personal in nature.

There are, however, some exceptions to this general rule, which limit or restrict the deductibility of otherwise legitimate business expenses. For example, you can deduct only 50% of the cost of business meals or entertainment, such as hockey tickets, even if you take your top client to dinner and the game.

The rationale for this limitation is that some level of personal enjoyment is inherent in either the meal being consumed or the entertainment being enjoyed, although hardened Leafs or Habs fans may disagree with the latter point.

When it comes to golf, however, the Tax Act is very strict in that both green fees as well as golf club membership dues are simply never deductible, no matter how strong your case may be that the expenses are being incurred to entertain clients or customers and generate income.

This harsh treatment of golf is no mere accident and can be traced back nearly 40 years to the major tax-reform proposals of 1972.

This was a conscious decision made by Parliament in which it was felt that the direct business purpose associated with certain expenses, such as golf, was “accessory or subordinate to the recreational and personal nature of the … golf activity,” as the Department of Finance remarked in a 1996 roundtable discussion.

According to Finance, the limitation on the deductibility of golf 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.”

The deductibility of golf expenses, however, is only one side of the coin. On the other is the taxable benefit associated with a corporately paid golf membership. In the past number of years, at least two tax cases challenged this point.

The first involved Duncan Gillis, who was successful in convincing a Tax Court judge that the taxable benefit he was assessed in respect of a corporate golf membership should be substantially reduced since the corporation received a significant business advantage, which ultimately led to increased sales, through its purchase of the golf membership.

The second case concerned Henry Rachfalowski, an insurance executive who was assessed by the Canada Revenue Agency for the value of a golf club membership notwithstanding that he “hated golf, could not golf and did not golf.” When the company offered him the membership, Mr. Rachfalowski even tried to refuse it and requested the cash equivalent, which his company refused. As a result, former Chief Justice Bowman found there to be no personal taxable benefit associated with the membership.