George E. Dube, CPA, CA
While the Canada Revenue Agency debates this, I’ll argue until I’m blue in the face that for the vast majority of serious real estate investors, the answer is an unequivocal YES. While I agree with the CRA that the amount is not a tax credit under the education/tuition tax credit rules, I refuse to believe anything other than the amounts are deductible under the general rules for deductions under subsection 18(1)(a) of the Income Tax Act.
Below is a segment of a Notice of Objection prepared by our office on this exact topic for a client of ours.
The disallowed education costs are predominantly (98%) the cost of the taxpayer attending monthly workshops put on by the Real Estate Investment Network (REIN) for its members. By letter of March 16, 2011, the auditor disallowed these costs on the basis that there was ‘not a clear and direct connection between these seminars and the income earned from the rental properties in the year.’ He also characterized the costs as training costs that resulted in a lasting benefit to the taxpayer and therefore were capital in nature. Finally he suggested the seminars ‘covered some rent-related topics.’
The taxpayer and her spouse own and manage a number of rental properties generating significant rental income. In order to assist them in carrying on their rental activities in the most efficient manner they are members of the Real Estate Investment Network. REIN is a national organization dedicated to providing its real estate investor members with the information, research, and strategies needed to manage a real estate portfolio. One of the ways in which they so assist their members is by putting on monthly evening member only workshops in cities across Canada. Regular features of these monthly workshops include such things as regional and local economic updates, mortgage forecasts, and current rental issue updates (e.g. grow-ops, bedbugs, job market impact on rentals), to name a few. A review of the 2008 topics list also reveals such subjects as classified ad writing tips for filling vacancies quickly, bookkeeping strategies to facilitate tax filings, legal rental issues tips and traps, working with realtors, and tax planning issues for real estate investors. Such workshops are held one evening a month and typically cover two or three update issues and two or three other subjects. Virtually all topics, not some, are directly real estate related. That is the purpose of REIN.
The April 28, 2010 CRA technical interpretation 2009-0347581E5 states the following.
It is not necessary to demonstrate that some income actually resulted from the training expense to ensure its deductibility is not denied under paragraph 18(1)(a) of the Act. This provision will not apply to deny the deduction as long as the training expense is part of the income-earning process.
Given the nature of the topics presented at the monthly workshops it is respectfully suggested that there is a clear and direct connection between these workshops and the real estate rental activity in the present instance. Furthermore, given the wording in the above mentioned technical interpretation, it is not necessary that the connection be directly connected to income earned from this activity as suggested by the auditor.
While I appreciate that the topic is somewhat subjective, it is disheartening to see CRA auditors routinely attempt to bully REIN members into believing that the amounts are not deductible.
Further, on several occasions I have learned that they explain to the taxpayer that the accountant must not know what they`re talking about since the amount is “clearly” not deductible. I’ve even had the CRA auditors refer taxpayers to other accountants including former CRA representatives. Yikes! I’ve lost two clients just in this manner, as they have believed that someone from the CRA must know more than a mere accountant.
In most cases, when presented with reasonable facts, the auditor allows the deduction. However, an unfortunate number of auditors and appeals officers, in off-the-record conversations, recognize that the average taxpayer is not financially capable of arguing with the CRA which has an unlimited supply of tax expertise and lawyers that are “free of charge” since taxpayers pay for them. Thus, the taxpayer who is being audited is not only paying for their own accountants and lawyers, but also the CRA’s auditors and lawyers. The end result? It is financially difficult to argue with the CRA, even when the CRA knows that they are wrong.
It is my strong hope that a REIN member with a little bit of financial clout and determination is the target of such an audit and can bring this matter to a final resolution in court.
George E. Dube, CPA, CA is a veteran real estate investor and accountant. He has spoken, written various articles, and co-authored two books on real estate accounting. Reach George at: firstname.lastname@example.org or @georgeEdube.