Toronto teen actor Dylan Everett, who was nominated for a Gemini award in 2009 and later won a Canadian Screen Award in 2013 for his role in Degrassi, found himself in a real life courtroom drama when he faced off against the tax man in a decision released last month.
Everett, who is now 22, was between 14 to 16 years old during the tax years in question, from 2009 through 2011. His company, named Shenanigans Media Inc., was also under review for its tax year ending July 31, 2011.
The Canada Revenue Agency (CRA) disallowed various expenses, totalling about $20,000, claimed by Everett or by Shenanigans, among which were expenses for wardrobe, hair, and make-up, research and development expenses, and various business promotion expenses.
Personal expenses not deductible
Under the Tax Act, “no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business.” In addition, “personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business” are not deductible.
In other words, when claiming business expenses for tax purposes, the taxpayer must show that the expenses were, indeed, incurred and that they were made for the purpose of producing income from the business and were not personal or living expenses.
The main issue before the court was whether some of the expenses Everett claimed were actually personal expenses and therefore not tax deductible.
Wardrobe and Makeup/Hair Expenses
During the years under dispute, Everett was in two television series, How to Be Indie and Wingin’ It. While he was provided with clothes by the production companies for the actual filming of the two television shows, he was required to make various promotional appearances and provide his own clothes. According to the testimony, “when in public, he had to maintain a certain public image and dress accordingly.”
The clothes purchased were “ordinary clothes that might well be worn by anyone of Mr. Everett’s age” and were purchased at such retailers as Sport Chek, H&M, American Eagle, the Bay and Foot Locker. They were used at promotional events and also used more generally.
As a universal rule, the cost of clothing that is generally worn is not deductible as a business expense and, for this purpose, it does not matter what an individual prefers to wear when not at work. Quoting a prior case, 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.”
Since clothing is “inherently personal,” the case law has generally concluded that clothing can only be claimed as a legitimate, deductible business expenses if the clothing is either not suitable for general wear, such as lawyer’s robes or a period costume, or if it has “special features uniquely necessary for the work,” such as safety-related clothing, or a chef’s uniform, or corporate-logoed shirts and jackets.
While the judge accepted that Everett had to maintain a certain image, this is not unique to being an actor. “Many people, whether they are employees or are self-employed, feel that they need to maintain a certain image both at work and in many public spaces and as a result may not dress as they would in private. That does not, of itself, convert an inherently personal expense into a business expense,” said the judge.
Grooming is also of an “inherently personal nature and analogous principles apply,” the judge said. In the three years at issue, nearly $7,300 was claimed for makeup and hair expenses and the CRA did allow nearly 50 per cent of it, which the judge said was “more than reasonable.”
“Research and Development” Expenses
While this was the term used on Everett’s returns, the judge said that this description “does not really convey what these expenses are.” The expenses were incurred for attending movies, purchasing DVDs and books.
Everett testified that he “has not taken acting classes and he watches movies to see how other actors perform,” at one point purchasing Michael Jackson videos “in order to study dance moves, some of which he had to replicate on a show.” He also said that he has “watched movies and read books in order to prepare for auditions for a role in a sequel to an existing movie.”
The judge was somewhat sympathetic to this line of reasoning, finding that, while these expenses normally have a personal element to them, the activities can be “a reasonable way to prepare for an audition or to help study and improve one’s craft as an actor.”
The issue, however, was that there appeared to be both personal movie receipts, in some cases where two or more people attended the movie, mixed in with what might otherwise be legitimate, business expenses and as a result, the judge concluded that only a portion of these expenses were deductible. Of the $4,400 of “research and development” claimed over the three years under review, the judge was prepared to allow a total of $1,400.
Business Promotion
Finally, included in the expense category of business promotion, were various meals and entertainment expenses, some of which appeared to be personal expenses which were denied.
Everett also claimed expenses of about $100 and $135 for purchases at EB Games, a videogame retailer. His mother explained that these expenses were incurred for him to have games in his trailer at the production site of the television shows. The judge, however, ruled that “this is clearly a personal expenditure and is not part of the process of earning acting income.”