I would like your opinion. I have seen this done both ways. I know that golf memberships and green fees are not deductible for tax purposes.
A client claims 95% of business comes from golfing (Realtor).
I was reviewing a T2 done by another accountant and they simply reversed golf dues on schedule 1. If the amount goes to shareholder loan, it increases the dividend to the shareholder. The method used by this accountant had no impact on the dividend.
I had a client (for many years) that had come to me from a C.A. firm - they had basically arranged to set up a corp. JUST to pay for golf for the shareholder(s). Corp. billed (related) active biz corps for consulting and then in turn paid for golf memberships/green fees etc. - golf added back on S1. I continued to file it that way for at least a dozen years until he retired/dissolved and the returns have never been reviewed or questioned….
“It depends.” (This is a pretty normal tax answer FWIW.)
Where the taxpayer corporation can CONCLUSIVELY establish that the expense is actually business-related and not personal in nature, and confers little, if any, benefit to the individual….there is no personal taxable benefit assessable (or there is, but it needs to be calculated on a rational basis).
It remains non-deductible to the corporation.
Careful logging (akin to a proper vehicle log) would be a minimum support mechanism IMO. Regardless,
(In this context you need to determine the relationship as "qua shareholder” or “qua employee”.)
I have seen, smaller firms, recorded shareholder drawing as loan receivable, to buried the shareholder loan issue, buried meals and ent in cost of sales, to avoid the 50% rule. Really, I don’t think any accountant would do something like that, but sometimes, if clients insisted, what can you do. I don’t know if bigger firms, communicated with clients on those, but they usually adjusted those on S1.
Both ways eliminate it as a DEDUCTION on the T2, which satisfies the section 9 (?) restriction. However, if it is simply added back on the S1, that doesn’t address the fact that the corporation paid for the golf dues, which constitutes either a shareholder benefit (under section 15) or an employment benefit (under section 6).
It is possible that an employment benefit was calculated and added to the T4 (if the shareholder also received salary in addition to dividends). That wouldn’t be obvious when doing the corporate year-end unless you also did the T4 prep.
But, it is more likely that the S1 add-back was done because it satisfies the non-deductibility rule, and “skipping” the shareholder loan debit would not be discovered as easily.
On the other hand, if it can be proven to be non-personal (as described by @SmallBizGuy), I’m not sure why it wouldn’t be deductible to the corporation.
I’m my experience, the larger firms tend to overlook or shortcut a lot. For example, a company with only an investment portfolio receives different classifications of income and return of capital. I have seen all distributions (whether income, gains, or ROC) reported as dividend income. This results in non-capital losses as dividends are deducted on Sch4, plus a huge RDTOH. All completely wrong, but never picked up. This also allows the corp return to be done before the end of February since they ignore all T-slips. I took over such a client years ago. I didn’t complete the T2 until mid-May after all slips were in and reconciled to the investment statements with receivables and payables recorded. My cost was higher than the previous accountant due to the time I took to tie in the investment statements with the T-slips, record income received in January which was on a T-slip of the prior year, and record a payable for December management fees paid in January of the next year. That’s my process. I usually also prepare a schedule of investments showing opening values, changes during the year, final cost, market value, and income earned. I think this is of value to my clients. Broker statements sometimes have incorrect costing, which can affect selling decisions. I’m probably overdoing things, but my clients appreciate it. I don’t like making assumptions about an income stream. Done right, it’s a source of satisfaction.
For those reading some of the above…just because it’s “buried” doesn’t make it “right”. As a professional preparer, YOU are also liable for such treatment because YOU (mostly) make that choice….so if the amounts are egregious, expect bad treatment from an audit.
Yes, we all take shortcuts, though most are less than egregious…it just isn’t worth the time to deal with $1,000 worth of mixed gains/interest/dividends on a non-calendar-year-end corporation…reports are mostly not available and the amounts are minor. Lumping them together is incorrect, but the tax difference is pretty small potatoes.
Failing to deal with golf fees, on the other hand…especially if they are “obvious”…is a clear failure on the part of the preparer. NO fees are deductible (though lunch etc is as an entertainment expense, subject to the 50% rule) and shareholder qua employee treatment and decisions are required. And yes….they may never be subject to audit, so may never be questioned.
Then again….YOU need to think about what happens if they are.
I always adjust it to SHL - assuming I know about it. It’s less work than trying to keep track of it and remembering to file a T4.
However, if the client buried the cost in an expense account somewhere, I may never know. Further, if the client insists his golf fees are directly required to earn income, and is prepared to defend his position to CRA (on his own, without my help), then I’ll let it go as a deductible expense (after explaining that CRA will summarily deny the deduction, and he’ll have to object, and maybe take them to court).
”18 (1) In computing the income of a taxpayer from a business or property nodeduction shall be made in respect of…
…
(l) an outlay or expense made or incurred by the taxpayer after 1971,
(i) for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility, unless the taxpayer made or incurred the outlay or expense in the ordinary course of the taxpayer’s business of providing the property for hire or reward, or
(ii) as membership fees or dues (whether initiation fees or otherwise) in any club the main purpose of which is to provide dining, recreational or sporting facilities for its members;”
@jeffliu
I’m not sure if making it “buried” by accident falls under the offences of 239(1)(c) or not, but possibly it does, if done on purpose.
Yes, @abechew309 I know that provision exists. I just don’t know WHY it exists. And, if a business’s income truly depends on paying club dues, how do they figure it could be both non-personal (i.e. no taxable benefit to the individual) and non-deductible (to the business). And, before you say it, yes - I know it’s not the only provision that does such a thing. I just shake my head because it doesn’t make sense.
The Income Tax Act is not built to “make sense”. It is built to achieve specific objectives in taxation.
The erstwhile Judge Learned Hand observed:
“[T]he words of such an act as the Income Tax, for example, merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception-couched in abstract terms that offer no handle to seize hold of-leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time. I know that these monsters are the result of fabulous industry and ingenuity, plugging up this hole and casting out that net, against all possible evasion; yet at times I cannot help recalling a saying of William James about certain passages of Hegel: that they were no doubt written with a passion of rationality; but that one cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness. Much of the law is now as difficult to fathom, and more and more of it is likely to be so; for there is little doubt that we are entering a period of increasingly detailed regulation, and it will be the duty of judges to thread the path-for path there is-through these fantastic labyrinths.”
Learned Hand, Eulogy of Thomas Walter Swan, 57 Yale L. J. 167, 169 (1947), quoted in Welder v. United States, 329 F. Supp. at 741-42 (S. D. Tex. 1971).
I am sure it’s illegal, if we do it knowingly, but seems like, clients always try to justifying this with their reasoning. And I see lots of ppl looking for evidence or case or support those type of reasoning.
@dawna777
”A client claims 95% of business comes from golfing (Realtor).”
Assuming that person is a 100% shareholder of his own real estate corporation and intends to continue that way, he is simply wasting everybody’s time by not making those payments out of his personal bank account.
Section 18 deems it to not be a deductible expense for tax purposes, no matter what his opinion on sources of business may be.
(Although, on the other hand, if he is one of those rare small business clients who actually read his financial statements, perhaps he likes to see a corporate line item for himself to realize how much that golf is costing him…)
…and the difference between us - as tax pros - and them as …well, “not”…is that WE are supposed to be familiar with how to read the law, cases, bulletins and the like and not just nice articles on some rando CPA’s website or on a news site that omits half the questions we would ask to determine the answers that are actually likely to pass muster.
Lots of talk on this subject… I am bewildered that a professional would consider “ because a client says it… it must be deductible”.
This whole subject was hashed out years ago and a decision was made that has not been reversed. The same arguments were made back in the day.
My Firm Policy is No, I will not process this as a deduction. The amount is charged back to Shareholder.
I work with mainly small business clients so it is very doable to regularly review Office, Advertising, Meals, Travel and Vendor names (basically what I feel an auditor would do). I reallocate to appropriate categories and advise my client and their bookkeeper what I moved and why.
If a client insists on a treatment that I feel is too controversial, I withdraw from the file and suggest they need to find another “professional” to prepare their tax documents. My reputation is too valuable to be a people pleaser.
We live in a democracy. The laws, include the ITA, are established by us - the citizens. If someone wants to challenge those laws, they have that right. It’s not unethical to challenge the law, if that is your INTENTION and you do it in a legal manner. As professional accountants we need to advise our clients on the probable consequences of their decisions, but it it is always, ultimately THEIR decision what to report on THEIR tax returns. On the other hand, if a client is “trying to get away with something” (i.e. tax evasion), and wants me to aid and abet them, I too would withdraw from the engagement.
Unless you’re actually doing a Review or an Audit, you have to be careful not to do too much investigation/correction. If it appears that you have been doing “audit level” work, and the client (or a third party) relies on it, the courts can hold you to that level of assurance. Then, if you’re a licensed CPA and you haven’t followed appropriate audit procedures, you will be reprimanded by your provincial CPA association. If you aren’t a CPA, you may receive a cease-and-desist order from the CPA.
It’s also worth noting that this doesn’t only apply to reviews and audits any more. Since CSRS 4200, compilations are more heavily regulated than they used to be under the old NTR standards. In many provinces, only CPAs are able to issue compilation reports under the new standard, due to the provincial CPA acts. I know in some provinces non-CPAs can technically issue CSRS 4200 reports, but the requirements of that standard make it more difficult than before.