This week, we learned that U.S. President Donald Trump paid only US$750 in federal income taxes for 2016 and 2017, and no personal income taxes whatsoever in 10 of the last 15 years. But the revelation that he deducted US$70,000 for the cost of his haircuts and hairstyling for appearing on The Apprentice has some taxpayers scratching their heads wondering whether personal grooming, along with a variety of other personal expenses, can ever be legitimately tax deductible.
Personal expenses
The Income Tax Act imposes very strict rules when it comes to the deductibility of business expenses. It states that “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.” Furthermore, it specifically states that “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, in order to make a successful business expense claim for what may otherwise appear to be a personal expense, like grooming, the taxpayer must be able to demonstrate that the expense was primarily related to earning business income.
The issue of whether haircuts and personal grooming can ever be tax deductible has come up several times over the years in Canadian tax law. For example, in 1993, the Canada Revenue Agency was asked whether “military regulation style haircuts” (presumably for members serving in the military) could be a deductible expense for income tax purposes. The CRA responded negatively, “since haircuts are considered personal care costs that are not deductible under the Act.”
More recently, the issue of grooming arose in a 2017 tax case involving a teen TV actor from Degrassi who attempted to claim nearly $7,300 for makeup and hair expenses. The judge found that grooming was of an “inherently personal nature,” adding that “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.… That does not, of itself, convert an inherently personal expense into a business expense.” The judge was prepared to allow 50 per cent of the actor’s grooming expenses, which the judge found to be “more than reasonable.”
But it’s not just haircuts and personal grooming expenses that can catch the ire of the tax man. Rather, any time an individual attempts to deduct what otherwise might seem to be a personal expense, the CRA may want to have a closer look. Take, for example, a recent tax case decided just last month.
The case
The case involved a 76-year-old Ontario geologist who worked in the resource extraction industry as a prospector, entrepreneur and inventor. He testified that during his 2011 taxation year (and for some time before and after 2011), he worked on a variety of entrepreneurial projects which were “high risk and high speculation.”
He proceeded to deduct $20,156 of business expenses for the 2011 tax year that were disallowed by the CRA. He argued the expenses claimed were legitimate business expenses related to his business activities as a geologist, prospector and inventor during that year, that they were incurred for the purpose of gaining or producing income from these business activities, and that they were not related to personal or living expenses. The CRA disagreed and the dispute landed in Tax Court.
The taxpayer produced 13 pages of spreadsheets setting out approximately 390 separate expense items, listed in chronological order providing details of the amount paid, item paid for, location, percentage claimed as business expense, and a file reference number.
At trial, the taxpayer conceded that some of the listed expenses “have a personal use component” and provided an estimated percentage of business usage as follows: clothing (10 per cent), home expenses (15 per cent), line of credit interest (10 per cent), Internet (60 per cent), hydro (15 per cent), phone line No. 1 (80 per cent), phone line No. 2 (30 per cent), cellphone (95 per cent), automobile (30 per cent), and entertainment (50 per cent).
The judge reviewed the expenses, allowed many of them, but had specific concerns about several of them. The judge questioned the auto expenses, which the taxpayer testified related 30 per cent to business use. The judge noted that since almost all of the taxpayer’s business-related travel was out of province which would have required air transportation and, since no logbook of any kind was kept by the taxpayer to establish what proportion of the distance driven in his vehicle was for personal vs. business use, these expenses cannot be properly tax deductible.
Turning to the interest paid on his line of credit, the judge felt that there was insufficient evidence to support a 10 per cent allocation of this expense for business purposes, so it was denied. As for the clothing expense, the judge rejected a flat 10 per cent allocation of everything the taxpayer spent on clothing as attributable to his work. “If there is any clothing that is necessary for this kind of work, then that specific item of clothing or equipment should be claimed as a business expense rather than arbitrarily claiming a percentage of the total spent on clothing,” the judge remarked.
Finally, the judge did not think it was reasonable to have three different telephones that were used for both personal and business use. Since the taxpayer’s business activities were mostly conducted away from home throughout Canada, it was reasonable that he would use his cellphone for business purposes, to the exclusion of the other two phones, the expenses of which the judge denied.