Sometimes it’s not good enough just to be “Right”

Advocates of the plain meaning approach to statutory interpretation (I’m one of them) argue that clear and unambiguous words in the Act should be applied as written, however much the CRA dislikes the result. Applying the plain words sometimes conflicts with the purposive approach to interpretation, which is based on the premise that taken out of context, even plain words are inherently ambiguous and ought to be given the meaning that most accords with the intention of Parliament in enacting them. CRA usually takes the purposive approach when it feels that an otherwise technically correct tax planning arrangement frustrates the intention of Parliament, and I usually rail against them doing so. However, every once in a while my affection for the sanctity of the plain words approach is challenged. A very recent Technical Interpretation, 2012-04571E5(E), September 17, 2012, is a good example.

The CRA was asked whether a self-employed golf professional could deduct the green fees paid to play practice rounds of golf. Apart from paragraph 18(1)(l) there would be no question about the deductibility provided the amount of the fees paid was reasonable. However, the paragraph specifically denies the deduction of expenses incurred “…(i) for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility…”. In a brief note the CRA said no, stating that “Regardless of whether or not the self-employed professional golfer has a business purpose with respect to the costs incurred for green fees, paragraph 18(1)(l) of the Act does not permit a self-employed professional to deduct these costs.”

I have no argument with the CRA with respect to the plain meaning of paragraph 18(1)(l); “no deduction” means “no deduction.” But the fact is that the paragraph was enacted to deal with a wholly different situation than the one described in the TI. The CRA itself succinctly states the reason for the paragraph in IT-148R3: “The intent of paragraph 18(1)(l) is to deny the deduction of outlays or expenses in situations where taxpayers provide recreational activities or facilities to persons such as business clients, suppliers, employees, shareholders or others for which the direct business purpose is marginal. Certain types of recreational properties or sites that were perceived as prone to being used for this type of activity were identified by Parliament and the deduction of outlays or expenses incurred for the use and maintenance of these sites is prohibited.” Not much doubt here about the intent of the paragraph: it was aimed at eliminating the deduction of green fees as a promotion expense. The problem for the golf professional, of course, is the fact that he pays the green fees to earn his business income, not to promote new business from existing or prospective clients.

So was the CRA wrong in ruling as it did on the question? Certainly not if one looks at the issue in a very technical sense. But I wonder whether the CRA is really being consistent here. In paragraph 5 of IT-148R3, the CRA says: “5. Any property that forms part of the inventory of a taxpayer is not subject to the rule in subparagraph 18(1)(l)(i). For example, if a taxpayer’s business involves the purchase or manufacture of yachts for sale, the maintenance costs of such yachts are not disallowed by subparagraph 18(1)(l)(i).” I note that there is nothing in the wording of paragraph 18(1)(l) that would justify exempting the yacht manufacturer from its application. Isn’t the clear implication of the Agency’s administrative position here that otherwise legitimate expenses of a business are not caught by the paragraph if they do not relate to the use of the yacht, golf course, etc., for promotional purposes? Why not extend the same administrative concession to other business expenses involving the use of a golf course instead of a yacht, but not for promotional purposes? There is a basic issue of fairness here. Sure, Finance could be asked to amend the paragraph to remedy the unfairness, but this is an unwieldy way to deal with the matter. It seems to me that the CRA ought to have extended its administrative position to the golf professional in this case. Being technically right isn’t good enough if the result is patently unfair.