A reminder to mind your business expenses

Posted By: Jonathan Crangle on August 15, 2012 at 4:53:16 in All , Case Comments

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By: Jonathan Crangle & Jonathan N. Garbutt

A reminder to mind your business expenses

Justice Jorré reminds us in Desgagné v The Queen that personal expenses are not deductible as business expenses under paragraph 18(1)(h) of the Income Tax Act.

The taxpayer in this case is a lawyer who often appears in court. Many of Ms. Desgagné’s court appearances require her to wear her formal legal attire (known as “gowns” – and yes, Canadian lawyers still wear long black gowns and white shirts with funny collars called “bands” in court; we have dropped the horsehair wigs). However, for court appearances not requiring gowns and bands, she purchased black clothing. Ms. Desgagné added the clothing to class 8 and claimed a class 8 capital cost allowance. The Minister denied the inclusion of the black clothing as a business expense. Ms. Desgagné, in previous years, had added gowns and bands to class 8, which were allowed by the Minister.

Clothing can only be deducted as a business expense in rare occasions where it is specialized clothing or a uniform. Since the black clothing could be worn anywhere, it was not specific to court appearances. The clothing was a personal expense. Justice Jorré upheld the Minister’s decision to disallow the deduction for clothing expenses.

Gowns and bands are only worn in court and may be deducted. Justice Jorré clarified that gowns and bands, and uniforms generally, do not belong in class 8. These items properly belong in class 12, under paragraph (i) “a uniform”. This is good news for anyone deducting such items, as class 12 has a higher depreciation rate than class 8.

Other than lawyers who wear gowns, there are a number of other professions and jobs that require specialized clothing. Those who need to wear “a uniform” of some sort that they have to provide themselves, should consider this as a tax tip that may be worth some money come tax time. But the line is clear – clothes that can be worn anywhere are not a capital expense, clothing that is specific to the business is a capital expense and depreciable.

A trifle for the court- but she won!

In 2006 and 2007, Ms. Desgagné claimed business interest deductions and bank fees from her personal line of credit. Justice Jorré agreed with the taxpayer that part of her line of credit was for business use. The taxpayer was permitted to increase her expenses by $14.70 in 2006 and $1.33 in 2007.

Arguing in court over $16 does not seem like a proper use of the court’s time, and we can only assume that this was a matter of principle for the taxpayer. The taxpayer believed that the CRA made mistakes that cost her money, and she fought them regardless of how small the amount. For this effort she came away with a (very minor) victory on this issue. They key point of all this is that the CRA can be beaten if you have the evidence necessary to back up your point that something like interest on personal line of credit (which would normally be seen as personal and therefore not deductable) is a legitimate expense if it is used in your business.

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