August 05, 2020
By Felix Wu, Associate and Milosz Zak, Associate, Farber Tax Law
In the recent Federal Court of Appeal decision of Guy Laliberté v Her Majesty the Queen, 2020 FCA 97,1 the lines between the proper allocation of personal benefits versus properly incurred business expenses was again drawn clear in the realm of tax law. While the case involved exorbitant amounts and an extravagant fact pattern, the fundamental principles regarding when an expense can be considered properly deductible on account of business has wide-sweeping implications for many Canadians who are currently working from home as a result of the COVID-19 pandemic. Here, we discuss the Laliberté case in further detail, and the risks of attempting to deduct the new standing desk that you bought for your home office.
Laliberté – Novel facts but the same fundamental tax law principles
As the founder and controlling shareholder of the acclaimed Cirque du Soleil, the name Guy Laliberté may be familiar to many. Mr. Laliberté had made it known in various public speaking engagements that he had a lifelong ambition of traveling the world and eventually into outer space.
In 2009, it appeared that Mr. Laliberté’s dream would be realized, as he entered negotiations with Space Adventures Ltd. for a trip that would take him to the International Space Station (the “ISS”). The transaction was ultimately structured not as a personal one, but rather via Mr. Laliberté’s family holding company – 27392224 Quebec Inc. (the “Family Holdco”). Eventually, in April of 2009, an “Orbital Space Flight Purchase Agreement” was reached between Space Adventures Ltd., Mr. Laliberté and the Family Holdco.
In planning for the trip to the ISS, Mr. Laliberté also undertook a broadcast event which he called the “Poetic Social Mission – Moving Stars and Earth for Water.” The goal of the broadcast was to benefit the One Drop Foundation, a clean water charity founded by Mr. Laliberté and associated with Cirque du Soleil. As detailed by the Honourable Mary J.L. Gleason in her judgment for the Federal Court of Appeal, “[Mr. Laliberté] viewed the trip as promoting One Drop and the Cirque du Soleil, but also as the realization of a childhood fantasy. [Emphasis added].”
The judgment at paragraph 8 then remarks on Mr. Laliberté’s structuring of the finances for the trip, along with some added commentary: “Unsurprisingly, the once-in-a-lifetime trip came with a once-in-a-lifetime price tag. The costs associated with the space flight totalled $41,816,954 … the Family Holdco paid these costs as they were incurred. [Emphasis added].”2
The Minister of National Revenue (the “Minister”) took issue with Mr. Laliberté’s financial activities when all but $4 million dollars of the trip was invoiced to an operating company in the Cirque du Soleil group, Créations Méandres Inc. (“Créations”) – one that was interrelated through a complicated chain of companies back to the Family Holdco. Using this structure, Créations issued a promissory note to the Family Holdco in the amount invoiced, totalling $37,816,954, but then also subsequently received the exact amount via contributed surplus through the company chain. In doing so, the amount was written off and paid for by the business.
An interesting note – why was the remaining $4 million not invoiced to Créations? Here, the appellant’s explanation is detailed in paragraph 11 of the judgment:
 The appellant included $4 million as a shareholder benefit in his 2009 tax return. Despite including this amount in his tax return, the appellant contends that he did not receive a shareholder benefit. Rather, he maintains that the $4 million sum was chosen as the estimated value of avoiding a dispute with the tax authorities and the bad publicity that might have occurred if nothing had been reported as a taxable benefit. [Emphasis added].3
Unfortunately, the structuring of the overall transaction did catch the attention of the Minister, and the immense publicity regarding this decision rendered the opposite effect to Mr. Laliberté’s intentions.
On April 10, 2014, the Minister issued a Notice of Reassessment to Mr. Laliberté adding $37,816,974 to his 2009 income as a shareholder benefit. This was followed by a Notice of Confirmation on January 13, 2015.
On September 12, 2018, the Tax Court of Canada issued its decision in favour of the Minister, determining the value of the shareholder benefit to be 90% of the cost of the trip (i.e. approximately $37.6 million), and referred the matter back to the Minister for further reassessment. Mr. Laliberté continued to appeal until the matter reached the Federal Court of Appeal.
As the Tax Court of Canada had noted in paragraph 56 of its reasons finding in favour of the Minister, “While the facts of this case are novel in some respects, it raises the relatively common and legally straightforward issue of benefits conferred by a company on a shareholder.”4 Likewise, as noted immediately in paragraph 1 of the Federal Court of Appeal judgment, the Honourable Gleason J.A. writes: “The circumstances giving rise to this appeal are unusual and exotic, but the issues that arise in this appeal are not.”5
Perhaps due to the nature of the fact pattern, both courts felt the need to re-emphasize the fundamental tax law principles at issue in the dispute. The question was simply whether the appellant, Mr. Laliberté, had in fact received a shareholder benefit pursuant to subsections 15(1) and 246(1) of the Income Tax Act6 (the “ITA”) in relation to the personal enjoyment he received in taking a trip to the ISS which was charged through Créations and the Family Holdco.
In referencing paragraph 11 of the Tax Court’s decision on the matter, the Federal Court of Appeal agreed that the, “…the motivating, essential and overwhelming primary purpose of the travel was personal.” Among the list of 27 reasons provided by the Tax Court, some particularly memorable lines include:a) “The appellant intended to take the trip personally and it was never a possibility that any other Cirque du Soleil official, entertainer or promoter would travel in his stead [subparagraph 11(a)]”;7
b) “The appellant testified as to his interest in space travel, grounded in several childhood experiences [subparagraph 11(b)]”;8
e) “When the CFO signed the cheques to pay Space Adventures, it was his understanding that the appellant was going to take the trip even if there were no Poetic Social Mission [subparagraph 11(e)]”;9
l) NASA would not allow any commercial promotion as part of the Poetic Social Mission broadcast or the related documentary. The Cirque logos were absent from both and Cirque du Soleil was only mentioned four times during the broadcast [subparagraph 11(l)]”;10
v) “In the [promotional] video, the appellant gave three reasons for his space trip, two personal and the other related to One Drop [subparagraph 11(v)];”11 and
w) “The appellant referred to himself as a “space tourist” fulfilling a personal dream in one of the media clips in the documentary [subparagraph 11(w)]”.12
Regardless of the “once-in-a-lifetime” fact scenario, the Federal Court of Appeal’s judgment in Laliberté serves to remind about the fundamental tax law principles in relation to subsections 15(1), 246(1) and paragraph 18(1)(a) of the ITA.
The shareholder benefit test pursuant to subsection 15(1) of the ITA
The framework for analyzing whether a benefit was conferred on a shareholder involves three steps:
- determining whether a benefit has been conferred on the shareholder qua shareholder;
- determining precisely what the benefit is; and
- determining the value of that benefit to the shareholder by asking what the shareholder would have had to pay for it had he or she not been a shareholder.
The Federal Court of Appeal further cited the seminal case of Pillsbury Canada Ltd. v Minister of National Revenue,  CTC 294,13 where the Exchequer Court highlighted that the determination is a question of fact; however, in cases where a transaction is merely a device or arrangement for conferring a shareholder benefit, those would also fall under subsection 15(1) of the ITA.
As noted by the Federal Court of Appeal, despite the appellant’s contention that the purpose of his trip into space was for business reasons, the subjective intent of the appellant is not determinative of the inquiry under subsection 15(1) of the ITA. As a question of fact, it was apparent that Mr. Laliberté’s plan to benefit Cirque du Soleil via the Poetic Social Mission was formulated after the trip was already committed to; therefore, as a question of fact, it could not be said that the trip was a bona fide business venture and was a shareholder benefit conferred to the appellant.
The subsection 15(1) test is different from the test under paragraph 18(1)(a) of the ITA
The appellant argued that the Tax Court erred in applying the test under paragraph 18(1)(a) of the ITA, as opposed to the appropriate subsections 15(1) and 246(1) tests for shareholder benefit. The test under paragraph 18(1)(a) of the ITA regards whether a business expense can be properly deducted in the computation of income. The question is whether the expense was validly incurred for business purposes. Conversely, subsection 15(1) of the ITA, as a deeming provision, focuses on whether a benefit was conferred to a shareholder. Both subsection 15(1) and paragraph 18(1)(a) of the ITA revolve around the determination of whether a transaction was made for a business or personal purpose. It should be noted, however, that subsection 15(1) is meant to be a punitive provision with no corresponding deduction at the corporate level, and therefore means to dissuade shareholders from abusing the corporations they control by receiving a benefit from the corporation without paying tax. The need to avoid the attribution of personal benefits from a corporation is apparent. Taxpayers inevitably invite an assessment which cannot be offset as a deduction to the corporation. In this way, the shareholder is subject to more tax than if they had received an ordinary payout via a dividend. The relationship between the two provisions and their application to the case was best summarized at paragraph 40 of the Federal Court of Appeal judgment:
 I would also note that, in assessing whether a benefit had been conferred, it was open to the Tax Court to consider as a relevant fact the income tax treatment afforded by Créations Méandres to the space trip expense. While not determinative of whether the appellant received a shareholder benefit, Créations Méandres’ decision to refrain from deducting the expenses for tax purposes is relevant to the Court’s assessment of whether the trip was a business transaction or personal in nature as it tends to show that the corporation did not consider the trip to have had a business purpose. Thus, while the issues of deductibility and shareholder benefit are distinct, they are to a certain extent inter-twined. [Emphasis added].14
As the appellant was unable to demolish the Minister’s assumptions that the trip to the ISS was a business venture for the Cirque du Soleil enterprise (i.e. via Créations and the Family Holdco), the Federal Court of Appeal dismissed the appeal. Although few taxpayers can relate to the amounts at stake and the benefits conferred to the appellant, the Laliberté case serves as an important reminder of the dangers of not only inappropriately claiming business expenses, but also potential reassessments directly to the taxpayer on account of the benefits they may receive.
COVID-19 – A review of the deductibility of home office expenses
The COVID-19 pandemic lockdown in March and April of 2020 caused many Canadians to rush to set up home offices. Subsequently, the news media began to tease taxpayers with the prospect of the deductibility of their home office expenses, which they had incurred in the course of their employment while forced to work from home. The truth is harder to swallow than the clickbait.
Although many of us will not be expensing our next trip into space, many Canadians may be wondering what they can get away with charging back to their employers while having to work from home.
Unfortunately, the conditions created by the COVID-19 pandemic lockdown do not immediately satisfy the requirements under subsection 8(13) of the ITA. The provisions set out the two conditions under which a taxpayer can claim a deduction. Specifically, the home office workspace:
- must be a place where the individual principally performs the duties of their office or employment; or
- the work space is used exclusively during the period in respect of which the amount relates for the purpose of earning income from the office or employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of the office or employment.
The subsection 8(13) deduction is limited to the taxpayer’s employment income, and any excess expenses can be carried forward and deducted in the following year, subject to the same limitation. The deduction is based on the square footage used for work. If approximately 10% of a taxpayer’s home is used for a home office, and that space is the place where that taxpayer meets clients, has their computer and filing cabinets, and if that home office is used for 6 months in a year, than only 5% of the yearly household expenses can be deducted from a taxpayer’s income. Accountants will further counsel taxpayers to prorate those expenses if that space is sometimes used for personal use. In any event, because the provisions require a per-year calculation, as opposed to month-to-month, few taxpayers will qualify to claim the deductions.
If a taxpayer qualifies to deduct home office expenses pursuant to subparagraph 8(13)(a)(i) or (ii), then they need to obtain the T2200 form “Declaration of Conditions of Employment” from their employer and keep it in case of a CRA audit, pursuant to subsection 8(10) of the ITA.
In the Leith15 decision in 2015, the Tax Court concluded that the T2200 does not have to be included with a tax return because the prescribed form contained instruction that, “The employee does not have to file this form with their return, but must keep it in case ask for it.” In this way, the Court concluded the CRA waived the required under subsection 220(2.1) of the ITA.
In situations where expenses would ordinarily be deductible, but for which a taxpayer does not have a T2200, subject to the taxpayer’s abilities to demonstrate that the employer unreasonable refused, or was unable to provided an executed T2200, the 2019 decision in Dnebovsky16 indicates that the expenses may nevertheless be allowed.
Taxpayers should also not be beholden to the fields within the T2200, as the form is not conclusive that an expense is or is not deductible. In Brown17 the Court articulated that the T2200 is not conclusive, and that the facts of the case will determine the eligibility of a claimed expense:
That [T2200] is a statutory condition precedent to the claiming of certain employment expense deductions and provides evidence of the terms of employment. The form is not conclusive or determinative if the evidence proves it to be wrong. Nevertheless, the requirement in subparagraph 8(1)(i)(ii) of the Act in respect of the salary paid to an assistant is only satisfied if it is essential that the expenditure be incurred in order for the appellant to carry out the duties of his employment. [Emphasis added].18
Presumably, if the CRA issues a directive and permits the deductibility of home office expenses on account of the COVID-19 pandemic, taxpayers would need to make a claim under subparagraphs 8(1)(i)(ii) and (iii), which relates to “office rent”, which was required by the contract of employment, and the “supplies” directly consumed in the performance of the duties of the taxpayer’s office or employment.
In the case of “office rent”, taxpayers can deduct a portion of the rent, heat, utilities, which are considered consumable “supplies” under subparagraph 8(1)(i)(iii), but this does not include property taxes, mortgage interest or insurance, or depreciation on home equipment as specified in the 2011 decision in Lester.19
It should be emphasized that the concept of “supplies” refers to things or materials used directly in the performance of employment duties. In the seminal Auclair20 decision in 2013, a flight instructor was allowed to deduct pencils, pens, paper clips, but not books which were not “consumed” and neither was the cost of regular training courses, which were required under the contract of employment to update the appellant’s skills every 12 months. Further, the CRA’s policy is that long-distance phone calls are deductible, as they are considered “consumed”, but not a monthly phone expense, because it is not “consumed”.
Taxpayers should familiarize themselves with the CRA’s Interpretation Bulletin 352R2 “Employee’s Expenses, Including Work Space in Home Expenses”21 and the T4044 guide “Employment Expenses 2019”22 before claiming expenses. In late April, the CRA announced a $500 allowance on computing equipment paid by an employer,23 subject to a receipt, thereby absolving a taxpayer of a taxable benefit on up to $500. In this way, if an employer purchases a laptop for an employee for $1,500, the employer would be able to deduct the expense, with the employee noting the $1,000 difference as a taxable benefit in the year.
Clearly, the legislation specifies that the home office must be required under the contract of employment, and therefore, this will have implications for future employment contracts and may result in a wave of novations to satisfy subparagraphs 8(1)(i)(ii) and (iii). If the CRA audits a taxpayer, they will almost always ask for the contract employment to see if the employer “required’ the taxpayer to incur the claimed expenses listed in the T2200. If the expenses are not required under the contract, the CRA is unlikely to allow the deduction.
The lessons learned from the Laliberté decision in respect to subsection 18(1)(a) and the diverse body of case law on the deductibility of home office expenses in subparagraphs 8(1)(i)(ii) and (iii) demonstrates that expenses have to have their appropriate business or employment purpose, a nexus with their intended use to be properly deductible, and must also conform to the governing principles of reasonability and proportionality. In fact, the CRA will rely on section 67, which is explicit that no deduction shall be made in respect of an outlay or expense in respect of which an amount is otherwise deductible except to the extent that outlay or expense was reasonable in the circumstances. Although some may view this as a mechanism permitting the CRA to challenge a taxpayer’s business decisions, what is reasonable is a question of fact in the circumstances of the time. Similarly, what may at first have been claimed as a legitimate business expense, conveniently enjoyed by a shareholder, may in fact be found to be a thinly veiled “benefit”, with all of its associated penalties and punitive tax, enough to cause some high rollers feeling the burn on re-entry.
Quite simply, the deductions claimed must be reasonable and supported by the facts. In the case of employees, there is an expectation that individuals allocate qualifying home office expenses on a reasonable and equitable basis. For shareholders, if the corporations they control confer a tax-free “benefit”, other than via dividend (i.e. which would be taxed personally), a shareholder benefit assessment may be on the horizon. Although the concepts surrounding “business purpose”, “deductibility”, and “reasonability” may bring some of us back down to earth after a media frenzy over the deductibility of home office expenses in the age of COVID-19 pandemic lockdowns, there will always be some among us who will seek to deduct their next visit to the ISS.
 Ibid, at para 8.
 Income Tax Act, RSC 1985, c 1 (5th Supp).
 Ibid, at para 19.
 Pillsbury Canada Ltd v Minister of National Revenue,  CTC 294,  1 Ex CR 676 (Can Ex Ct), at paras 18–22.
 “Employee’s Expenses, Including Work Space in Home Expenses”, IT352R2, CRA, <https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it352r2/archived-employees-expenses-including-work-space-home-expenses.html>.
 Employment Expenses”, T4044, CRA, <https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4044/employment-expenses.html>.
 CRA Views 2020-0845431C6: Advantage imposable – télétravail/Taxable benefit – Section 6(1)(a), 6(1)(b), CRA, April 22, 2020.