Introduction: Attendance of Conventions as a Capital Expenditure
While Canadian tax law doesn't sharply define what constitutes a capital expense, it roughly characterizes a capital expense as one that "brings into existence an asset of enduring value." A number of factors and circumstances bear on whether an outlay is properly characterised as a capital expense. But a capital expense is basically an expense that you incur to acquire a business, investment, or personal asset—examples include: the purchase price of a personal residence, the cost to invest in a mutual fund, and the outlay to purchase machinery or computers for a business. A capital expense also includes the cost of significantly renovating or improving a real property.
Canada's tax system generally bars a taxpayer from deducting a capital expense. Instead, it allows a taxpayer to account for the asset's expense when computing any capital gain arising from the asset's sale.
Otherwise, Canada's Income Tax Act allows a taxpayer to deduct a capital expense only if a specific tax rule permits. For instance, the capital-cost-allowance (CCA) regime permits you to account for the depreciation of your business assets by allowing a deduction of a portion of the asset's cost per a prescribed annual rate.
This article discusses another such rule: subsection 20(10), which allows limited deductions for expenses incurred to attend a business or professional convention. These sorts of expenses are characterized as capital expenditures because the educational aspect of conventions gives the attendee an opportunity to increase knowledge about the business. And, like any other business asset, that knowledge has "enduring value." In short, it's an investment in human capital.
Before reviewing the rule itself, we provide some background by discussing income-tax deductions for business expenses and the general prohibition on deducting capital expenditures. The final section of this article offers tax tips for those who may have erroneously claimed excessive deductions for convention-attendance expenses.
General Prohibition on Deducting Capital Expenditures unless "Expressly Permitted": Paragraph 18(1)(b) of Canada's Income Tax Act
Under subsection 9(1) of the Canadian Income Tax Act, a taxpayer's income from business consists of that taxpayer's business profit. As a result, when computing taxable business income for the year, a taxpayer may generally deduct expenses that reduce the business's profit—e.g., salaries, advertising costs, interest on business-related loans, etc.
Subsection 18(1) of the Income Tax Act sets out various prohibitions on deductible expenses. In particular, paragraph 18(1)(b) generally precludes a taxpayer from deducting a capital expenditure unless the deduction is "expressly permitted."
As a result, you typically cannot fully deduct the cost of a capital expenditure in the tax year that you incurred that expense. In other words, you cannot deduct these expenses on a current basis—i.e., as they occur. Instead, capital expenses are usually added to the tax cost of a property. This in turn influences either the capital-gain computation of a non-depreciable capital property or the capital cost allowance of a depreciable capital property. For example, the cost of purchasing a building for your business is an expense that confers an asset whose benefit will persist beyond the year in which you incurred that expense. So, Canada's tax system precludes you from deducting that full expense in the year of the purchase. Rather, the amount is added to your tax cost for the property, and you're permitted to deduct a portion per year in light of depreciation. In addition, you can deduct the (undepreciated) tax cost of the property against the proceeds that you receive when you sell the building.
Still, the Income Tax Act does "expressly permit" you to deduct some capital expenses on a current basis. One example is the deduction for convention-attendance expenses under subsection 20(10).
Income-Tax Deductions for Convention-Attendance Expenses: Subsection 20(10) of Canada's Income Tax Act
Subsection 20(10) allows you, when computing your taxable business income for the year, to deduct the expense that you incurred to attend a trade fair, trade show, exhibition, conference, or convention. But the deduction comes with the following restrictions:
- You must have attended the conference "in connection with the business";
- The convention must have been held by "a business or professional organization at a location that may reasonably be regarded as consistent with the territorial scope of that organization"; and
- You're only allowed to deduct the expenses for two conventions in a single year.
Subsection 20(10) may operate to limit your travel expenses should the Canada Revenue Agency construe the attended event as a "convention." In particular, the case law raises concerns for those in a business relying on multi-level marketing, network marketing, and referral marketing—such as Amway. For example, in Michayluk v Canada,  TCJ No 773, Amway distributors incurred expenses to attend numerous meetings outside Canada in an attempt to move their direct sales business into a larger, more lucrative network. The Tax Court of Canada held that those meetings were "conventions" and therefore subsection 20(10) applied. As a result, the distributors were only allowed to deduct the expenses relating to two meetings. Likewise, in both Wees v Canada,  TCJ No 1992, and Roche v Canada,  TCJ No 105, Amway distributers incurred travel expenses to attend several Amway meetings. Yet subsection 20(10) limited their deductions to expenses for only two such meetings. In each case, the Tax Court of Canada determined that the meetings were meant to develop long-term assets. The court therefore concluded that the costs incurred to attend the meetings were capital expenditures.
Tax Tips – Voluntary Disclosure for Excessive Convention-Expense Deductions
While many taxpayers suspect that the Income Tax Act permits a deduction for expenses incurred to attend business-related conventions, some fail to understand the restrictions on this deduction. As a result, taxpayers may underreport income and thereby expose themselves to significant monetary penalties if they deduct expenses relating to more than two conventions in a single tax year. In addition, you can't deduct the convention expense if the convention wasn't held by a business organization or a professional organization. You also can't deduct the expense if the convention wasn't held "at a location that may reasonably be regarded as consistent with the territorial scope of" the organization holding the convention.
If you deducted expenses for attending a convention under any of these circumstances, you risk triggering the Income Tax Act's various monetary and criminal penalties.
An application under the Canada Revenue Agency's (CRA) Voluntary Disclosures Program may offer a remedy. But you lose this option if the CRA discovers your mistake beforehand.
So, speak with one of our experienced Canadian tax lawyers today. We can review your situation and discern whether you're indeed non-complaint. If so, we will carefully plan and prepare your disclosure application. A properly prepared disclosure application not only increases the odds that the CRA will accept your disclosure but also lays the groundwork for a judicial-review application to the Federal Court should the CRA unfairly deny your disclosure.