I spent a few days in Hong Kong last week attending my grandma’s funeral. (Thank you for all the clients who’ve reached out. Much appreciated.)
While I was there prepping for this week’s blog post, I found a court case about Cirque du Soleil’s majority shareholder travelling to space. He deducted his entire trip in Cirque du Soleil’s operation, claiming that this trip increased publicity and provided media coverage that would otherwise cost over $300million to achieve.
The cost of my trip to Hong Kong was slightly less than $1,500. The cost of his trip was $42million.
Many real estate investors and small business owners asked me this question before – can I deduct my trip as travel expense?
We can use my Hong Kong trip and Cirque du Soleil’s owner, Guy Laliberte’s trip, to answer this question.
Generally speaking, you can deduct expenses that you incur to earn business income/rental income, subject to a bunch of exceptions, as specified in the Income Tax Act.
Whether you are eligible to deduct a trip, you need to answer the primary question – did you incur the travel expense for earning business income?
In another word, also as cited in the court case, is the primary purpose of your trip business or personal?
I was in Hong Kong to attend my grandma’s funeral.
You know how it is, when you travel by yourself without kids, you suddenly got lots of time to spare.
I used my spare time to do a few marketing videos, a couple of blog posts and had worked on my future book.
Can I deduct my trip to Hong Kong?
As you can tell, the primary purpose of my trip was to attend my grandma’s funeral.
I did spend some time doing some work, but the business-related reasons were very minimal compared to the primary objective of my trip.
The answer to the question is no. I can’t deduct the flight and hotel of the trip.
But I can deduct the incremental costs I incurred for working on the business while I was there.
I didn’t incur any expenses for my video recordings and book writings. If I did, those incremental expenses would have been deductible.
If I had met up with a prospect to discuss future business opportunities, the meal costs for taking this prospect out would have been deductible.
What about Guy Laliberte’s trip to space?
His trip cost roughly $42million. He deducted $38million and leaving $4million as shareholder benefit.
If he’s allowed to deduct the $38million, he would probably save 27% in taxes, equivalent to $10million tax savings.
Since the expense was NOT allowed and the expenses were paid for by the company, he now had to report this $38million in his personal tax return, resulting in personal taxes of $19million. Yikes!
No wonder CRA is going after this!
The judge acknowledged the increase in media exposure to Cirque du Soleil because of his trip to space. However, the judge concluded that the primary purpose of the trip was for personal purpose rather than for business purpose based on the following reasons:
- Guy Laliberte admitted in multiple videos’ interviews that going to space had been his childhood dream
- The two initial payments (worth USD$25M) made to the space company organizing the trip were made by Guy Laliberte’s holding company, rather than directly from Cirque du Soleil’s operation. Resolution to authorize the trip did not mention the purpose of the trip.
- Agreement with Space Adventures was initially signed with Holding Company. Not directly with Cirque du Soleil.
- There was no evidence showing that anyone else other than Guy Laliberte would be sent to space.
- Defendant claimed that the expense helped Cirque du Soleil’s debut in Russia. Russia’s operation has other arm’s length partners, the cost of the show was charged back but later got reimbursed. Russian’s operation bears no cost for the trip.
- Cirque du Soleil did not monitor the increased exposure during and shortly after the trip was taken.
- Cirque du Soleil’s promotion planning was started after Guy Laliberte committed to taking the trip.
In conclusion, the judge found that the primary purpose of the trip was purely personal, so he disallowed the deduction but allowed the actual costs incurred by Cirque du Soleil and One Drop Foundation to promote the trip.
What is deductible if I can’t deduct my Hong Koong trip and Guy Laliberte cannot deduct his trip to space?
The main takeaway is this: the primary reason for your trip must be a business purpose.
If the primary purpose of the trip is to attend a business-related conference or to meet with suppliers/prospects/clients, make sure you have documentation such as email communications before you plan the trip.
The sequence of events matters.
If you also want to take a tour have some R&R while you’re there, timing and evidence would matter.
Room & board, however, would be deductible if the trip is for business. Expenses incurred for personal enjoyment would not be deductible.
On the other hand, if you plan your vacation first, then tag on some business activities afterwards. The timing of your email communication and planning would have been completely different.
Publicity may be good or bad, be careful with what you publish online. ?
Whenever I tell people that CRA auditors do google as well, people always laugh.
It’s true. If you can search for the information, CRA auditors can do the same thing. And trust me, they would!
If you are telling people on social media that you are taking your family for a Disney cruise, chances are, they can also find out!
What you publish online matters.
Family can come along but be careful and deduct only what’s business related.
If your family is coming along and they do not participate in the business, you probably should keep their expenses as personal.
If the primary purpose of the family making the trip was to help at the tradeshow, the trip should be deductible.
Just be mindful with the key consideration here: is the primary reason for your trip business related or personal purpose?
Until next time, happy Canadian Real Estate Investing
Cherry Chan, CPA, CA
Your Real Estate Accountant