The ability to deduct myriad business expenses is one of the biggest tax advantages of being a self-employed financial advisor as opposed to being an employee. That being said, there are still limits as to what an advisor can legitimately deduct for tax purposes as B.C. advisor Hans Rupprecht recently learned in a Federal Court of Appeal decision (Rupprecht v. the Queen, 2009 FCA 314) released in October.
Mr. Rupprecht, a financial advisor during 1999 and 2000 (the years in question), was appealing a 2006 decision of the Tax Court of Canada denying some of the expenses he claimed in computing his business income which were subsequently challenged by the Canada Revenue Agency.
Among the deductions originally denied by the CRA were Costco membership fees, amounts paid to clients to reimburse them for RRSP penalties they paid as well as business clothing.
Costco fees
Mr. Rupprecht deducted $48.15 to renew his Costco membership to permit him to shop for office supplies and other items used in his business. He later did not renew his membership because “he was able to obtain the necessary products and supplies at other stores.”
The Tax Court Judge found that the Costco membership fees were indeed incurred for the purpose of earning income from his business and thus were properly deductible.
RRSP Penalties
During the years in question, Mr. Rupprecht reimbursed various clients for RRSP penalties that were assessed for exceeding the then-foreign content limit of their RRSPs. This was done by Mr. Rupprecht to keep his clients from moving their business to another financial advisor.
Mr. Rupprecht cited a Supreme Court of Canada decision which found that penalties paid in furtherance of business purposes should be deductible. (The Tax Act was subsequently amended in 2004 to deny penalties from being deductible.)
The Tax Court Judge allowed RRSP penalty reimbursements made by Mr. Rupprecht to his clients to be deducted since they were found to be reimbursements of amounts incurred by his clients which directly resulted from fluctuations in the value of securities in their RRSP accounts on which Mr. Rupprecht advised.
Clothing
The CRA disallowed over $8,400 of suits, ties, shirts and accessories Mr. Rupprecht purchased in 1999 and 2000, all of which were purchased at Ermengildo Zegna, an exclusive men's wear boutique in downtown Vancouver. He testified that he wore these clothes for his work as a certified financial planner and “only for work purposes.”
As Mr. Rupprecht stated, “We had put together an office in Langley and spent approximately $60,000 on it in 1997 or 1998" and he therefore needed “suitable clothing to go with the office.” As evidence, he entered a letter from a sales associate at the Zegna store in support of his position. He argued that since the deduction of clothing expenses is not specifically denied under the Income Tax Act, then it should be permitted.
The Tax Court found that “clothing is prima facie a personal expense” and that the deduction of personal expenses is specifically prohibited by the Income Tax Act. As the Judge wrote, “Expenses relating to one's personal appearance are the very essence of a personal expense and involve choices made by a taxpayer in preparing him or herself for work. I conclude that the clothing in issue was used by (Mr. Rupprecht) as personal wear in everyday business and therefore its cost is not deductible.”
The clothing expense was the main subject of the appeal to the Federal Court of Appeal in October. The Appeal Court, however, was not persuaded that the Tax Court Judge “committed any reversible error with respect to the law, or any palpable and overriding error in applying the law to the facts or in making findings of fact.”
As a result, the FCA sided with the Tax Court in finding the business clothing not tax deductible.