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Tax Notes
Stupid Tax Tricks

By: David Louis, J.D., C.A., Tax Partner.
Minden Gross LLP

(*This release is based on an article published in Tax Notes, January 2005, Number 504, CCH Canadian Limited)

Lists are New Year’s traditions.  So in this article, I will reveal my top stupid tax rules.  Younger readers in particular may find this educational:  some of these rules are so old and ridiculous that you may not even be aware of them.  But whether or not they are news to you, you’ll see they have one (unfortunate) thing in common.    

So without further ado, drum roll please.

Recreational Facilities and Club Dues

Paragraph 18(1)(l) prohibits expenses:  

for the use or maintenance of a yacht, camp, lodge or a golf course or facility . . .

as well as

membership fees or dues . . . in any club the main purpose of which is to provide dining, recreational or sporting facilities to its members.

This provision conjures up visions of well-heeled execs wining and dining customers in posh dining rooms, before adjourning to oak-paneled lounges for port. 

These days, the entertaining is more likely to take place in the Air Canada Centre – if only. . .  But for years, pitched battles were fought over the precise meaning of a “yacht” or “lodge”, for example.  As a young gun in my old CA firm, I remember being under standing orders from my managing partner to figure a way to claim write-offs for an afternoon on the links. 

Little has been written on this provision in recent years.  Is it because everyone forgot about it?  Have younger accountants assumed that it’s just another 50%-deductible entertainment expense?  If so, I can hardly blame them.  Why should these items be treated any more harshly than other food and entertainment expenses?  Is there something inherently evil in a round of golf?  

Alas, it will take nothing less than a majority government to get this stupid tax rule off the books; otherwise I’m positive that Jack Layton would go for a non-confidence motion.

Workspace in the Home

Subsection 18(12) was put on the books in 1988, to restrict office-in-the-home claims by professionals and businesspeople (with similar restrictions for employees, per subsection 6(13)). 

The very wording of the provision is intimidating:

Notwithstanding any other provision of this Act, . . . no amount shall be deducted in respect of [a workspace in the home] except to the extent that the workspace is either (i) the individual’s principal place of business, or (ii) used exclusively for the purpose of earning income from a business and used on a regular and continuous basis for meeting clients, customers or patients . . . in respect of the business.

For some professionals at least, these requirements would rarely be met: if the professional actually had meetings with clients in his or her home, it is unlikely that it would be in the home office itself, let alone on a regular and continuous basis. 

Fair enough, I suppose.  But take a look at the CRA’s forms for business and professional activities[i].  With these seemingly stringent requirements, one would think that there would be a caution on the form: Warning! Stringent requirements must be met!  But there isn’t a hint of them - even in the T1 Guide itself.  Instead, the forms’ home office expense calculations take up the better part of the page – containing a very handy list of items to deduct.  If the forms could speak, they would say “Please write these off!”  To get wind of the restrictions, one has to go all the way to the fine print in the Business and Professional Income Guide.  So if taxpayers claim home office expenses improperly, one can hardly blame them.

Blame Canada

Some of our most stupid tax rules are founded on misguided patriotism.  My favorite is Regulation 1102(1)(e), which prohibits CCA deductions for:

• paintings, etc. not less than $200;

• hand-woven tapestries or carpets and the like, the cost of which is not less than $215 per square metre;

• engravings, etchings, and so on made before 1900; or

• antique furniture costing not less than $1,000.

• If you stopped there, the regulation would simply prohibit write-offs for artwork, antiques and the like.  But wait. There is an exception to the first two restrictions if the creator was a “Canadian” - within the meaning assigned by Regulation 1104(10)(a) no less - at the time the property was created. 

Don’t get me wrong.  I have no problem encouraging investing in Canadian art – in fact, this would help support a number of relatives.  My problem is whether these rules are enforceable, let alone enforced (more on this later).    Is art appreciation now part of CRA’s training?  How many tax auditors can tell, say, a Bush (Jack, not George!) from a Haro or Riopelle, or whether an engraving, etching or lithograph was made before 1900 or later?

For readers who are scratching their heads as to who in the world would dream up something like this, here’s a clue: the rules are effective after November 12, 1981.  Yes, this is another clunker from the infamous Alan MacEachan budget – a witch hunt against well-heeled taxpayers (OK, so I’m still not over it).  This is the same budget that proposed canning capital gains reserves (they settled for the five-year rule).[ii]

Charitable Donations

The last stupid tax rule I’ll mention comes from only a year ago – it is proposed subsection 248(35).  Buried in the anti-avoidance rules aimed against so-called “buy-low/donate-high” charity deals is a rule that states that if a taxpayer acquired the property less than three years before the gift is made, the receipt is based on the actual cost of the property (or fair market value if less).  But contrary to what many believe, this provision does not require that the acquisition be part of an art-donation scheme.

While the rule has been with us for over a year, I doubt that many people are aware of its breadth.[iii]  Many institutions have sections of their websites devoted to gifts-in-kind.  A quick search I did some weeks ago did not reveal a single institution which even mentioned this rule on their sites.  In fact, even a CRA publication seems to suggest that, for the rule to apply, you must intend to donate the property when you acquire it:

This limitation applies to property that was acquired under a gifting arrangement. It also applies to certain property that was acquired by the individual less than three years before the day the gift was made. It must also [emphasis added] be reasonable to conclude that when the property was acquired, the taxpayer expected to make a gift of it.[iv]

In fact, though, the rule applies either if the property was acquired within three years - or with no time limit if it is reasonable to conclude that when the property was acquired, the taxpayer expected to make a gift of it.

Dumb and Dumber

Actually, this brings me to the point of this article.  One might simply sit back and dismiss these rules as silly.  But there is a more disturbing side to them.  I suspect that what they all have in common is the fact that they are honoured more in the breach than in the observance.  If so, the resultant atmosphere of non-compliance does not bode well for our tax system - that’s the real reason I think they are “stupid”. 

In last month’s article, I talked about overreaching and frighteningly complex tax rules resulting in an increasingly uncertain tax system.  But whether the rules are scary or just dumb, it may all boil down to the same sort of thing: in a system where non-compliance is commonplace, one can hardly blame taxpayers for feeling that the Income Tax Act is just a bunch of silly rules that only a chump would honour.