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  • Richard Fonagy

Are Your Expenses Reasonable



Reasonable Expense Checklist/Items to Remember

The checklist for the application of section 67 of the ITA is sometimes difficult to separate from personal or business expense analysis under section 18.


The checklist and comments are meant to assist in determining what evidence should be gathered (if any) to prove an expense is reasonable.

1. If an audit result proposes that an expense is personal and unreasonable, seek clarification.

2. Is the auditor really saying the expense is personal? If yes, then evidence about the business nature of the expense is required.

3. Is this an issue of quantum? If yes, then evidence of how the quantum is reasonable should be presented.

4. Neither the CRA nor the courts should use section 67 as a method of second-guessing the business judgement of the taxpayer. Poor decision making is not a basis for denying an expense under section 67.

5. Despite (3) and (4), issues of quantum typically arise where a payment is being made to someone who is perceived as not arm’s length with the payor. InGabco the court acknowledged the Crown’s concerns about the amounts paid to a family member. However, the court concluded that the evidence showed the payments were reasonable.

6. The client should be able to provide a business reason for the expense. In Hammill the FCA stated that circumstances might arise where a client would pay more than market value for an expense if there are sound business reasons for doing so.

7. Section 67 applies to reduce the quantum of an unreasonable expense to a reasonable amount.

8. An expense is not deemed to be unreasonable based on the revenue generated by the business.

9. An expense should not be denied simply because the auditor thinks it is extravagant. The personal biases of an auditor should not come into play.

10. Payments to family members and extravagant expenses are dealt with under paragraphs18(1)(a)&(h).

11. Generally, a dispute over reasonableness is preferable to a dispute about the nature of an expense. A personal expense is denied in whole. There is an opportunity to negotiate an expense to a reasonable amount. However, a settlement reducing an expense to a “reasonable amount” may be difficult for a client to accept if there is no apparent personal benefit to the expense.

12. Case law that pre-dates the 2002 SCC decision in Stewart should be reviewed closely. In pre-2002 cases section 67 was sometimes invoked as part of a larger REOP analysis. That same expense might be reasonable absent REOP.

13. If the dispute is really a dispute about the reasonable nature of an expense, the CRA may have a published policy statement on the issue. For example, the amount of remuneration paid to owner/managers of businesses is not usually challenged by the CRA unless the remuneration causes some unusual tax advantage.


Are Expenses Reasonable:

When you are faced with an audit, this is what is meant by "Quantum" or is an amount being disputed or just its Quantum meaning the deduction is valid however the amount (quantum is in question):


Now that the nature of a business completely expense is clear, the next consideration is whether the expense is reasonable.

  • In many tax audits, paragraphs 18(1)(a) & (h) of the ITA are coupled with an examination of whether an expense was reasonable under section 67 of the ITA.

Section67 is straightforward. 67 In computing income

  • no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

33In Stewart v. R.34the SCC sets out steps to be taken before section 67 applies.

  • The proper analysis is to determine if there is a source of income pursuant to section 9 of the ITA.

  • The characterisation of expenses occurs in other provisions of the ITA, particularly under section18.35 In respect of section 67 the SCC stated as follows.

  • As well, if, in the circumstances, the expense is unreasonable in relation to the source of income, then s. 67 of the Act provides a mechanism to reduce or eliminate the amount of the expense.

  • Again, however, excessive or unreasonable expenses have no bearing on the characterization of a particular activity as a source of income.

  • To date, the SCC has only provided that section 67 of the ITA is a tool for characterizing business expenses as reasonable or unreasonable. Currently, there are no particularly helpful SCC directions on how to make that determination

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