That wintertime convention in the sunny south - is it tax deductible? Maybe it is and maybe it isn't. Get a handle on the tax rules before you hit the high spots.
It's warm out now. But come winter, you know that business conference in California will look inviting. However, is the trip a deductible business expense? Are travel and other expenses paid by your corporation taxable benefits for you? If your spouse goes too, how are those expenses treated?
Under the Income Tax Act, reasonable expenses related to owner or employee attendance at professional or business conventions and conferences are tax deductible for corporate businesses, self-employed individuals and partnerships if attendance is for a business purpose. Travel and attendance costs for training seminars and courses may also be deducted.
Depending on the circumstances, traveling employees may or may not have a tax liability for expenses covered by their employer.
The Canada Revenue Agency (CRA), ever alert for boondoggles masquerading as conventions, is quick to jump on expenses for trips that seem more for personal vacation than professional or business improvement.
Several rules of thumb provide some direction on how attendance at a convention will be treated by CRA.
A taxpayer carrying on a business may deduct costs incurred in attending up to 2 conventions per year provided the conventions are:
- Held by a business or professional organization.
- Connected to the taxpayer's business.
- Held at a location consistent with the territorial scope of the sponsoring organization.
Territorial scope is defined relative to the location of the organization holding or sponsoring the convention. If the organization is active only in Manitoba (the Manitoba Cattle Producers' Association, for example), then CRA would consider a Manitoba convention locale reasonable. If the sponsor organization were national in scope (the Canadian Cattlemen's Association, for example), then a convention site anywhere in Canada would be considered appropriate.
Under the Canada-United States Tax Convention, however, expenses incurred by a Canadian resident or citizen attending conventions held in the U.S. are treated as if the conventions were held in Canada. This also includes seminars, meetings and similar functions.
You can deduct convention fees and all travel and accommodation costs in their entirety. Food, beverage and entertainment costs are limited to 50% of the amount paid.
If the sponsor organization is international (the World Hereford Association, for example), CRA might accept expenses for a convention held outside North America. In this case, however, proving the relevance of the convention and related subject matter to your business becomes even more important, because far-off locales generally come under closer scrutiny by CRA.
Always keep the convention itinerary and session outline as backup to validate a business purpose. This recommendation applies to travel to any location whether provincial, national or international.
CRA definitely will not accept expenses for a national convention held on an ocean cruise ship. Even if the ship travels between Canadian and U.S. cities or 2 U.S. cities the convention is deemed to be outside North America, and therefore not allowable.
Employees traveling to a convention raise further tax issues. When CRA monitors convention expenses, 2 situations frequently generate assessment of a taxable benefit in the hands of an employee.
The first is when a spouse, companion or children travel with the employee. If the employer picks up the tab or reimburses the employee for their travel costs, CRA generally will consider this a taxable benefit to the employee (not the spouse or companion).
Since spouses are often actively involved in a farm or family business, a case may be made for both attending the same conference. If your spouse is also a salaried employee of the business, and you as the employer request your spouse's attendance at the convention, the business could deduct the spouse's travel expenses. Such a deduction would not be considered a taxable benefit in the hands of either spouse assuming the expenses otherwise meet the business purpose test.
A word of caution here: Should CRA balk at such expenses, you would have to prove the relevance of your spouse's attendance to the achievement of your business goals.
The second situation occurs when an employee adds vacation time to a convention trip and the employer covers the costs. CRA then requires a division of travel and other expenses between personal and business portions. The portion of costs allocated to personal use will be treated as a taxable benefit to the employee by CRA. This situation could also arise when the purpose of a convention trip is considered primarily (more than 50%) personal in nature.
Not all business travel is connected with conventions. You might also travel from time to time to learn new skills. CRA considers training costs, including travel expenses to a distant location, as either capital expenditures or not capital in nature. The distinction is significant.
Training costs identified as capital expenditures are considered to give long-lasting benefit to the taxpayer. They cannot be deducted as a current business expense. The costs of taking university or community college courses that lead to a degree or diploma are examples of expenses that are treated as capital in nature.
Training expenses that are not capital in nature include upgrading skills or knowledge that relate to yours business or profession. Examples include a farmer attending a course on the latest soil nutrient management techniques or adapting computer technology to farming. For this type of training, CRA will accept costs, including travel and lodging, as a current business expense.
Such expenses are still scrutinized to determine if any portion of a claim is personal or unreasonable. Key factors here include duration of training, course location, and number of days when no training is taken.
CRA generally accepts full-time training courses of 2 to 3 weeks duration. They may accept longer periods provided the time taken doesn't appear so great that the taxpayer would be unable to carry on his/her business for a significant part of the year.
Expenses for training taken outside a taxpayer's general geographic region are considered unreasonable by the amount they exceed the cost of training at a closer location. The same goes for training outside continental North America. CRA will disallow expenses for training in international locations that exceed the cost of similar training within North America.
Living expenses on days when no training is taken are also disallowed. Exceptions include travel days to and from the training location, and weekends if the training program extends beyond a week.
As with conventions, CRA takes a closer look at training courses held in recognized holiday or resort locations such as Orlando or Las Vegas.
An employer may normally deduct expenses for an employee's training regardless of whether the training benefits the employer or the employee. If only the employee benefits from the training, however, the cost is a taxable benefit in the hands of the employee.