Back to School: Should Costs of Developing Promising Young Athletes Be Deductible?

It’s back to school time and as every parent knows, arts and athletics are expensive activities for children to partake in at this time of the year. 

Those who can afford to enrol their children in such activities usually consider the expenditure to be a good investment in their child’s personal development and health, without expecting a fiscal return on their investment. Other parents, however, consider their investment might one day pay them dividends, and, innovatively, have tried to write off the costs of athletic development against future income potential.

The Tax Court of Canada (“TCC”) recently decided a case involving an interesting partnership structure purportedly established to fund young athletes with the hope that one day they would turn professional and re-pay the investors. The TCC considered the objectives of the venture and provided a sound analysis of the law surrounding partnerships and tax deductions before dismissing the taxpayer’s appeal in Michel Bouchard v Her Majesty The Queen.

Background. Michel Bouchard (the “Appellant”) established a partnership known as the Tennis Mania Limited Partnership (the “Partnership”) in order to generate funding to support his daughter’s tennis development. At just 9 years of age, the Appellant was confident that his daughter was talented enough to make a career out of playing tennis. 

The proclaimed object of the Partnership was to promote junior tennis and support young promising athletes. Initially there were two young athletes receiving support, but soon funding was taken away from the other because, in the eyes of the Partnership, she lacked the potential to become a professional. From that point onward the Partnership focused exclusively on one child, Eugénie Bouchard, without attempting to procure further talents to advance its objective.

There were only two investors in the Partnership, the Appellant and a long-time friend. The understanding between them was that when Eugénie turned professional, she would pay the investors 10% of her tennis earnings until they recouped all they had invested, plus a 10% per annum return on their investment. This arrangement was not mentioned in the partnership agreement, however. The Appellant invested about $25,000 a year for the years 2005-2007. The other investor contributed over $30,000 over two or more years.

Justice Masse of the TCC concisely described the organization of the venture as follows:

“The money was funneled through the partnership bank account in order to create a tax deductible expense for the Appellant which was equal to the amount that he had actually spent for his daughter’s tennis expenses that year. This amount would then be claimed as a partnership business loss for that taxation year in the Appellant’s income tax return. This resulted in significant tax savings to the Appellant and thus made it easier for him to finance Eugénie’s burgeoning career.”

Sponsorship deals were procured by the Appellant for his daughter from Head, Adidas, and 2K Sports; these amounts, totaling somewhere just over $100,000, went to Eugénie though, and not the Partnership. From the inception of the partnership almost ten years ago the Partnership has not made any return on its investment.

Since the sole beneficiary of the enterprise was the daughter of the Appellant, the CRA argued that the expenses were personal in nature. It was also argued that the venture was not objectively in pursuit of profit and therefore should not be tax deductible. “The goal of the enterprise was to fund the Appellant’s daughter’s development as a tennis player while at the same time creating a tax deduction for the Appellant” argued the CRA. “There was no reasonable expectation of profit.”

How did the Court analyze the case? Find out next week, in Knowledge Bureau Report.

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.

Source: http://decision.tcc-cci.gc.ca/en/2013/2013tcc247/2013tcc247.html