Boat owners beware - the cost of using your boat for business purposes will likely not be a legitimate, tax deductible expense.
In a technical interpretation letter released last week, the Canada Revenue Agency responded to a taxpayer's query as to whether he can deduct a portion of the expenses he paid to operate his personal boat when calculating his business income for the year.
The taxpayer asking the question was in the business of providing maintenance management services for buildings. The business is generally operated from his home but the taxpayer spends about three months each year at his cottage, which happens to only be accessible by boat.
If he needs to travel to visit a client while he's staying at his cottage, he must take his boat to the mainland before driving his car to the client's location. The taxpayer writes that he also occasionally entertains clients on the boat.
The taxpayer wanted to know whether he could claim tax depreciation as well as various operating expenses for the use of the boat for either of these two purposes.
Under the Income Tax Act, an individual is permitted to deduct legitimate business expenses incurred for the purpose of earning income in arriving at his or her net income for tax purposes. The expenses must also be "reasonable." There is a specific prohibition, however, against deducting "personal or living expenses incurred by a taxpayer" unless he or she is travelling away from home for the purpose of earning business income.
The CRA responded that if an expense exists "absent any business need," then that itself is a "strong indication it is personal in nature." In other words, an expense that you incur merely to make yourself "available to the business" including the cost of travelling from home to the business is considered to be a personal expense. As the CRA wrote, "an individual is expected to be available to the business to earn business income."
As a result, the CRA concluded that neither any tax depreciation nor any operating expenses for the boat would be deductible since the taxpayer needs the boat to gain access to his cottage and this need, which the CRA refers to as "personal in nature," would be there independent of any business need. The CRA also felt that any additional travel expenses resulting from the taxpayer's decision to live at the cottage during those months while continuing to serve his clients may also be "unreasonable."
As for the costs associated with using the boat for entertaining, the CRA referred to a prohibition in the Tax Act which explicitly denies any expenses associated with "yacht, a camp, a lodge or a golf course or facility." The term "yacht" has been broadly interpreted by the jurisprudence to include "a vessel that was primarily or generally used as a pleasure craft."
This anti-yacht/golf rule was introduced as part of the major tax reform of 1972 as a way of curbing "expense account living" on the government's dime.