Deductions and $120K Courtside Tickets: The Workings of a Tax Mind

Jared Burns from Louisbourg Investments explains how to help your clients from deducting expense they should not have, landing them in hot water with CRA!

One of the benefits of being a tax advisor is we get to think about taxes in almost any situation. Some “normal people” might call this a curse but I’ll be the first to admit I enjoy the mental exercise.

For instance, I was watching the nations beloved Raptors during game 5 at home against Golden State and had the thought, “I wonder how many of these folks sitting courtside with a client or prospect will deduct 50% of their ticket price?”. The general rule is that you can deduct up to 50% of the cost of meals and entertainment. But only if they meet these two considerations:

  1. The purpose of the expense is to earn income

  2. The amount of the expense is reasonable in the circumstances

But what happens when courtside ticket prices are around $120,000 for a pair, as reported by CBC news June 8, 20191? Let's agree that that is a lot of money to watch a sporting event. Where we won't all agree is whether the deductions of 50% of $120,000 tickets would be permissible.

Some advisors may immediately say that this deduction is not permissible. A good tax professional will instead consider all the facts, tax law, case law and CRA positions.

1https://www.cbc.ca/news/canada/toronto/raptors-tickets-nba-finals-game-5-1.5168080

Let’s go through two different fictional scenarios to help illustrate.

Scenario 1: Sandra the Architect

Your client, Sandra recently sold her very successful architectural firm to Aecome. The world’s largest multination architecture firm. Sandra's company designed some of the most iconic buildings in Canada. Now Sandra being semi-retired will dabble in a little consulting work every odd month. She decides she is going to go to the big game and invites her neighbor who is a good friend and huge Raptors fan. Sandra also designed her neighbor’s house at friendly hourly rate.
They enjoy the game and catch up on the neighborhood gossip. Sandra decides she’s going to deduct her tickets against her consulting income since her neighbour was a client of hers. She can't find her receipt but does have an online bank statement showing the large charge.

Scenario: Jeff the Player’s Agent

Another one of your clients, Octagon Basketball is a Canadian corporation run by Jeff Austin. Jeff’s clients include some of the biggest mega stars in basketball. Jeff decides he’s going to leverage the opportunity of the big game and take his newest client, Zion Williamson. Zion is the highest touted prospect for the upcoming draft, (the next Lebron James). Jeff decides that bringing the upcoming superstar will help him solidify his relationship.

The two talk about the upcoming NBA draft and the negotiation process that will follow his rookie contract. Jeff even takes the time to explain to Zion how he works with his current client out on the court, Stephen Curry. Jeff knows that most of the NBA's biggest stars are represented by premier agents like himself. In fact, Jeff remembers reading data collected by Hoops Hype and Spotrac that said; of the $3 billion in team payrolls, more than $1.5 billion in salaries are represented by the ten most powerful agents.

After the game Jeff goes to his office and drafts his notes of the discussions he had with his client. He writes out his strategy going forward with Zion and estimates the earning potential of a well negotiated contract could add for his firm. A firm that already has players under his umbrella with total annual salaries of 100 million a year. He files always all his receipts and documentation, so he's prepared come tax time.

Let’s Compare

In the first scenario with Sandra. If she claims the $60,000 (50% of the $120,000) for the tickets on her taxes CRA will disallow the deduction in full. Why? because it does not meet either of the considerations mentioned above.

  1. Was the expense made to earn income? No, she has already completed the work for the neighbour and the likelihood of sizable repeat work from her as a client is low.
  2. Was the amount reasonable in the circumstances? No, the amount of the expense in comparison to a couple hours of fees is unreasonable. The Minister of Revenue will deny the expense, if it was through a corporation they will also include a shareholder appropriation and they will deny any related input tax credits. Plus, the Minister will assess Sandra with gross negligence penalties under subsection 163(2) of Income Tax Act.

Contra to scenario one, lets consider the scenario involving Jeff Austin’s agency firm. Jeff has a much stronger argument in being able to meet the two considerations outlined above. First, I would argue the expense was to earn income.

The relationship with players he wishes to represent is key to the development of his revenue. Remember Jeff gets paid on a percentage of the contract he negotiates for his clients. No client means no revenue and the better the player the better the contract. But good players mean fiercer competition from other agents looking for larger contracts. Second, was the amount paid reasonable in the circumstances? A $60,000 deduction for a sporting event would very rarely be reasonable.

But, this is a business that makes tens of millions a year and depends on relationships with clients, who are in fact basketball players. Jeff and his advisors along with detailed documentation should be able to show that the deduction is reasonable under the circumstances or that an amount very close to the amount paid is reasonable.

Use your professional judgment

These are only two scenarios about the deductibility for meals and entertainment. Many client situations are going to fall anywhere along the spectrum. That is why as tax advisors we spend time thinking about the implications of situations and events as they unfold around us.

Tax law is ambiguous, it is not rigid or absolute. It will often need professional interpretation. Always remember this is where as advisors we add value for the client. Help them understand and appreciate sentences like; “reasonable expectation of profit” and “reasonable in the circumstances” when they ask about things like meals and entertainment. On top of that ensure your client knows the importance of good documentation.

Try to help your clients from deducting expense they should not have, landing them in hot water with CRA. Also, help them claim legitimate deductions. So, they don't pay more taxes than they're suppose to.

This writing is for general information purposes only. It is not intended to provide legal, accounting, tax or personalized financial advice. For complex matter you should always seek help from a professional accountant. Any opinions expressed are my own and may not reflect those of Louisbourg Investments.

About the Author

Jared Burns, CPA, CA

Manager, Tax and Estate Planning
Jared Burns holds a bachelor’s degree in commerce from Mount Allison University. He obtained his chartered accountant (CA) designation in 2012 and has completed all three parts of the CPA Indepth Taxation curriculum. At Louisbourg Investments, he is the Manager of Tax and Estate Planning where he works with their investment team, clients and other professional service providers to identify tax and estate planning opportunities custom to their unique circumstances and needs. Jared oversees the firm's compliance function and ensures that we consistently abide by the highest industry standards in our regulatory responsibilities helping to ensure maximum investor confidence.