5 January 2005 External T.I. 2004-0094761E5 - Application of 67.1(2)(a) and 67.1(2)(c)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether or not the exceptions in paragraphs 67.1(2)(a) or 67.1(2)(c) of the Income Tax Act apply so that the 50% limitation in 67.1(1) of the Act does not apply to a department store and a book publisher selling promotional packages.

Position: Paragraph 67.1(2)(c) is not applicable in this situation. It is our general view that since the taxpayer will receive compensation for all items in the promotional packages, the exception in paragraph 67.1(2)(a) of the Act will apply so that the 50% limitation in subsection 67.1(1) of the Act will not apply.

Reasons: Paragraph 67.1(2)(a) applies where the ordinary course of a business of the taxpayer is that of providing food, beverages or entertainment for compensation.

2004-009476
XXXXXXXXXX Luisa A. Majerus, CA
(613) 957-2138
January 5, 2005

Dear XXXXXXXXXX,

Re: Application of paragraphs 67.1(2)(a) and 67.1(2)(c)

This is in reply to your letter dated September 15, 2004 requesting confirmation that the 50% limitation in subsection 67.1(1) of the Income Tax Act (the "Act") will not apply to situations where a company purchases food, beverages, entertainment or vouchers redeemable for these items, that are packaged together with their regular product and sold as a unit as part of a promotional campaign.

Specifically, you have provided the following examples:

1) A department store wishes to promote the sale of a specific brand of baking pans by selling them in a package together with a recipe and the food ingredients required to prepare the recipe. The department store will have the recipes printed and will purchase the ingredients from a food manufacturer. A third party will be contracted to package the food items and the recipe inside the baking pan. The combined package will sell for a limited time either:

a. At a price that does not exceed the regular price of the baking pan only; or

b. At a price that exceeds the regular price of the baking pan.

2) A book publisher wishes to promote a book that is being re-released to coincide with the release of a popular movie. The publisher makes an arrangement with a chain of movie theatres to provide vouchers for free tickets for the movie, as well as vouchers for discounts off the posted price of admission to the movie. The publisher will insert the vouchers into the book and will advertise that the book contains these vouchers. The movie theatre bills the publisher for a portion of the face value of the vouchers redeemed. The combined package will sell for a limited time either:

a. At a price that does not exceed the regular price of the book only; or

b. At a price that exceeds the regular price of the book.

You have asked us to comment on whether the limitation in subsection 67.1(1) of the Act will apply to limit the amount of the deduction to 50% of the actual cost of the ingredients or movie vouchers. In addition you have asked us to comment on whether our answers would differ depending on the price of the promotional package as described above.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following general comments.

Subsection 67.1(1) of the Act limits the deduction for an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment to 50% of the amount actually paid or an amount in respect thereof that would be reasonable in the circumstances.

Paragraph 67.1(2)(c) of the Act provides that subsection 67.1(1) of the Act does not apply to an amount for which the payor is compensated and the amount of the compensation is reasonable and is specifically identified in writing to the person paying the compensation. In the circumstances provided above, it is our view that this exception to subsection 67.1(1) of the Act does not apply since there is no indication that compensation received is reasonable or specifically identified in writing.

Paragraph 67.1(2)(a) of the Act provides that where a person pays an amount for food, beverages or entertainment provided for, or in expectation of, compensation in the ordinary course of a business carried on by that person of providing the food, beverages or entertainment for compensation, the limitation in subsection 67.1(1) of the Act will not apply.

It is a question of fact whether or not the ordinary course of a business of the taxpayer is that of providing the food, beverages or entertainment for compensation. However, in both examples, it is our general view that since the taxpayer will receive compensation for all items in the promotional packages, the exception in paragraph 67.1(2)(a) of the Act will apply so that the 50% limitation in subsection 67.1(1) of the Act will not apply.

We trust this information is helpful.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch