Be careful what expenses you write off, especially when they could be considered personal. Take the recent case of Laird Stevens (Stevens v. The Queen, 2012 TCC 312), a writer and part-time English professor at Concordia University in Montreal.
He claimed nearly $20,000 in meals, entertainment and travel costs in 2007 and 2008. Stevens published a novel in 2010 and a children's book in 2011. From 2002-2007, he worked on another novel, Paradise Lost, which was still unpublished at the time of trial.
Trips to Paris and London
In 2007, Stevens travelled with his spouse, mother-in-law and three-year-old son to Paris for 30 days and to London for seven. He claimed about $15,000 in expenses for these two trips.
He testified the purpose of his stay in Paris was to conduct research for Paradise Lost (part of the action takes place there). And, he said the purpose of the London trip was to show his ex-spouse, a former editor, the book's manuscript. During that week, Stevens and his family stayed at his ex-spouse's house. He claimed a per diem of $100 and testified that as a result of his ex-spouse's review, he made changes to his manuscript.
Stevens claimed delivery expenses—mainly, taxi receipts. He testified that since he didn't own a car, on the evenings he taught at Concordia he took a taxi so he could work on Paradise Lost at the library. He also expensed the cost of taxis to visit bookstores "to check out the competition."
In 2007 and 2008, he expensed meals he ate with his spouse and son "so that they could discuss the philosophical content and the illustrations of his [children's] book."
He also claimed music CDs, "because he likes listening to music, mainly piano, when he writes," and for children's DVDs "because he intended to write a script for a movie and a cartoon series."
The CRA ruled all travel, delivery, meals and entertainment expenses shouldn't have been deducted as they weren't related to earning 2007 and 2008 business income.
Under the Income Tax Act, you can only deduct an expense "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, no deduction is available for personal or living expenses.
The issue in the case was the connection between the expenses and the source of income. The judge felt "most of the expenses claimed by [Stevens] could be described as borderline because they have a significant personal component and an economic benefit was received by [his] family."
With respect to the travel expenses, the judge said, "there is no cause-and-effect relationship between the expenses incurred and the income generated. The travel expenses claimed for 2007 are clearly unreasonable considering the gross professional income of $667 earned…in 2007."
The judge also denied the delivery expenses, citing a prior case that deemed expenses incurred travelling to and from home to work as personal.
The meal expenses were also denied since they were personal costs. The fact that Stevens discussed work matters during the meals was "not a sufficient reason to allow the deduction of the costs in question for tax purposes."
A similar conclusion was reached for the entertainment expenses, which were found to be "incurred for [his] personal enjoyment."
So, next time you write off expenses, make sure they're truly connected to your business.
Originally published in Advisor's Edge Report
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