It’s interesting how what is not ok with family and social development, is perfectly fine with the law.
For example, it’s perfectly legal for a sibling to pay their brother or sister to do their chores. But I believe most parents would veto this idea, because although ok by law, it’s the principle that counts.
It’s clear that the law doesn’t always recognize that certain behaviours may be against other laws. Take for example, while it’s illegal to marry more than one person in Canada, our law for tax purposes will allow you to treat more than one person as a spouse, if each meet the definition under the income tax act.
What type of payments are deductible? Let’s talk about the top non-deductible expenses. Here's a list.
1. Fines and penalties
Section 67.6 of our tax law will deny a tax deduction for fines and penalties that are levied by any person or public body that has the authority to impose the fine or penalty under a law of a country or of a political subdivision of any country (including a state, province or territory). So, if you are charged any fines or penalties – including parking or speeding tickets – those amounts won't generally be deductible. However, there is no prohibition to deduct fines and penalties imposed under private contracts (for example, a penalty charged for late performance).
2. Personal or living expenses
It’s a common rule, that costs that are personal in nature can't be deducted for tax purposes. These include things like clothing, costs related to your home (mortgage interest, property taxes and repairs, for example), insurance premiums etc. I must add, that although some of these items are not personally deductible, they can be deducted if you operate a small business and meet certain criteria. Please use this Business Activity Checklist as a guide. The onus is on the taxpayer to draw a link between a cost incurred and an income-producing purpose. Drawing this link doesn't necessarily mean the taxman will agree that the cost was incurred to earn income, so be aware that you may need to build an argument that the cost was incurred to earn income from a business or property.
3. Capital expenditures
Generally, capital costs cannot be deducted in a single year. If a cost is capital in nature it will be deducted (depreciated) over the useful lifespan of the asset. Think of a tree-and-fruit analogy. If you spend money to buy a tree (Capital Asset) so that you can grow fruit and sell the fruit for a profit, then the cost to buy the tree is capital in nature and is not deductible. On the other hand, if you don't own a tree but rather purchase the fruit and sell it for a profit, the cost of the fruit would be deductible as a current expense. The law allows you to deduct the cost of the capital asset over time through the capital cost allowance system.
4. Recreational facilities and club dues
Costs incurred for the use or maintenance of a yacht, camp, lodge or golf course (unless you're in the business of providing these things), will generally be denied as a deduction. In addition, membership fees or dues (initiation fees or otherwise) in any club, the main purpose of which is to provide dining, recreational or sporting facilities to its members, will not be deductible. Apologies to golfers everywhere in this country who get together for business purposes.
5. Meals and entertainment
Its common to eat every day to survive. So, it makes some sense that only a portion of meals and entertainment expenses are deductible. Our federal tax law will deny a deduction for 50 per cent of these costs, with some rare exceptions (as in long haul truck drivers).
6. Illegal payments
Not surprising, Section 67.5 of our tax law denies a deduction for illegal payments. Specifically, any expense incurred for doing anything that is an offence under Section 3 of the Corruption of Foreign Public Officials Act or under many provisions of the Criminal Code, will not be deductible. And, by the way, our tax law allows the taxman to reassess a taxpayer to deny these deductions even beyond the usual three-year limitation period.
This list is non-exhaustive and just scratches the surface of limitations on tax deductions. If you need clarification on other deductions please feel free to Contact us.