Quebec advisor wins expense deduction case

The decision in Silber c. Agence du revenu du Québec, released earlier this year, confirms that sponsorship expenses are deductible even when the taxpayer has a personal interest in the sponsored sport or activity, said Geneviève Leveille, a partner with PwC Law LLP in Montreal.

“As long as the expense of the advertisement is incurred by the taxpayer for the purpose of gaining or producing income from [their] business employment, and the expense is reasonable in the circumstances, the expense ought to be deductible,” Leveille said, adding that the decision generally aligns with previous case law.

In 2014, Arthur Silber, a veteran advisor with CIBC Wood Gundy in Montreal and an avid cyclist, co-founded Silber Pro Cycling through a corporation in which he was a shareholder. To promote his advisory business, Silber paid $265,000 in 2015 and $330,302 in 2016 to be the team’s title sponsor. He deducted the amounts from his employment income — which consisted entirely of commissions — of approximately $1.5 million in 2015 and $1.3 million in 2016.

Revenu Québec did not dispute that Silber met certain requirements under the province’s Taxation Act, which mirror those found in the federal Income Tax Act, to deduct expenses: his employment was connected to the selling of property or the negotiating of contracts on behalf of his employer; he was required to pay his own expenses; he was required to carry on all or part of his duties away from his employer’s place of business; and he was paid exclusively by commission.

However, Revenu Québec denied the deductions for the two taxation years, arguing that it found inconsistencies between invoices and receipts issued by the cycling team to Silber and amounts the agency received. Revenu Québec also questioned whether the sponsorship amounts paid to the team were actually shareholder loans or advances, which would not be deductible.

However, the judge in the case dismissed the arguments, saying the evidence showed that Silber paid the amounts in question as sponsorship amounts.

Revenu Québec then argued that the sponsorship amounts were expenses insufficiently related to the taxpayer’s office or employment. The agency said it found only one reference to Silber’s business, it said, and no mention of his brokerage firm, on the cycling team’s website.

However, the court found that the evidence did not back up the tax authority’s contention. For example, Silber’s name was clearly featured in the team’s name, logo and website name, as well as on the cyclists’ jerseys, shorts and shoes. Both sides of the team’s jerseys also featured the name of his brokerage firm.

The court then examined the reasonableness of the sponsorship amounts, factoring in case law. The standard to be considered, the court stated, was how a “commercially minded businessperson would behave in the same position as Mr. Silber. The tax court’s role is not to evaluate a taxpayer’s business acumen or to second guess his spending choices.”

The court also noted that it was “immaterial whether the advertising produces income or not. It is the purpose that counts,” and the fact the taxpayer had an interest or derived satisfaction from a sponsored activity wasn’t a reason to disallow the expense.

However, “where the expense for which the taxpayer claims the deduction is incurred for the taxpayer’s personal benefit or for the taxpayer’s leisure or hobby, the deduction shall be denied,” the court said. It also noted neither Silber nor his family benefited from the cycling team’s equipment or products: Silber “is acting primarily as title sponsor of [the team].”

Leveille said keeping good records when claiming expenses is important, particularly when the amounts claimed are significant, which could increase the risk of an audit.

“You want to have the invoices prepared at the time you paid the expenses, and you want everything to reconcile and to align, because the more inconsistency [there is], the bigger the risk that the tax authority, as in this case, will want to deny the expenses,” Leveille said.