When a Hotel Is Not a Lodge – 18(l)

Volume No. 05-21

“The CRA lost their argument that country hotels are lodges.”

A recent case looked at whether payments for weekend trips awarded to employees were deductible expenses under paragraph 18(1)(l) of the Income Tax Act (Hewlett Packard (Canada) Co – 2005 TCC 398). In this case, Digital Equipment Limited of Canada, which became Hewlett Packard, paid for weekend trips for key employees. The amounts disallowed in each of three years were approximately $450,000.

Paragraph 18(1)(l) prohibits a deduction for expenses incurred for the use of a “lodge.” These trips were essentially holidays. The employees who received awards for meeting their targets were expected to attend. Attendance was not optional. During the day, the employees could spend time as they wished. At night, there were usually dinners that recognized their achievements. The cost of the weekends was included as a taxable benefit to the employees and part of the taxes resulting from the income inclusion were reimbursed by Digital. The only issue to be determined was whether or not the amounts paid by Digital were deductible from taxable income.

The Crown suggested that the ordinary meaning of “lodge” includes a broad range of accommodation, including a hotel. If, however, “lodge” is limited to describing hotels in country settings, the Crown submitted that it includes the hotels that Digital used in the relevant taxation years. The hotels used were Clevelands House Resort, Deerhurst Resort, The Delta Lodge at Kananaskis, and Chateau Bromont Resort Hotels. All are very large hotels in country settings. The Court noted that the main question in the appeal was whether the word “lodge” included resort hotels of the type that Digital employees visited during the taxation years at issue. The Court quoted many definitions of “lodge” from various dictionaries.

The Court determined that these hotels were not lodges within the meaning of paragraph 18(1)(l). The Court looked at the French word for “lodge” and determined that none of these hotels would fit the definition of a “lodge.” The Court went on to state that: “if Parliament had wanted to deny a deduction for using these types of hotels, other words would have better described this intent.”

In our view, the CRA tried to deny these large deductions by attempting to expand the definition of “lodge.” Caution should still be used for those situations where companies pay for employees to go to smaller places that could be considered lodges.


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