My name is Mark Goodfield and I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is about income tax, business, the psychology of money and investing topics and is meant for taxpayers no matter their income bracket, but in particular for high net worth individuals and entrepreneurs who own private corporations. I also blog about whatever else crosses my mind; I have to entertain myself. This is my personal blog and the views and opinions expressed in this blog do not reflect the position of Cunningham LLP. I am blunt and opinionated (at least for a Chartered Professional Accountant). You've been warned.

The blogs posted on The Blunt Bean Counter provide information of a general nature and should not be considered specific advice, as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, January 13, 2014

Golf – The Business, Social and Income Tax Aspects

I have had enough with winter! So I thought a great way to take our minds off ice storms and cold weather would be to talk golf. Readers of my blog know that I am a golfer. Of all the sports I have played, golf has been far and away the most difficult to master. However, the beauty of golf is that you do not have to be a scratch golfer to enjoy the game and the social aspect is by far the most enjoyable of any sport (especially for trash talkers like me). When you have some semblance of a golf game and some degree of social skills, various studies
Pebble Beach
suggest golf is an excellent business tool.

Today, I will look at the various studies and articles out there examining whether or not playing golf can increase one’s wealth (because of the business conducted on the course and the business connections made) and since this is a tax blog, review the income tax implications of the costs associated with playing the game.

The Perception vs. the Reality


Many people perceive golf as a rich man’s sport or a game for the elite, yet the lineups at public courses suggest otherwise. According to the National Golf Foundation, only 10% of the 26 million golfers in the USA belong to private clubs. Thus, golf may be a way to climb the social and monetary ladder even if you do not belong to a private club. Melissa Leong of the National Post suggests golf may help if you plan on raising you child to be a CEO.

Golf and Remuneration


There has only been one definitive study of the correlation between golf and increased wealth. This study called “Illusory correlation in the remuneration of chief executive officers: It pays to play golf, and well” was authored by Gueorgui Kolev and Robin Hogarth of the University of Pompeu Fabra in Spain. Although the study relates to CEO's, I assume it would translate down the corporate ladder.

In the abstract to the paper, the authors state; “although we find no relation between handicap and corporate performance, we do find a relation between handicap and CEO compensation. In short golfers earn more than non-golfers and pay increases with golfing ability”. The paper quantifies the “golfer’s advantage” by stating “CEO’s who are not regular golf players receive about 17% less in total ex-ante compensation.”

Predator Ridge
The authors argue that golfing ability confers an intangible “halo” effect on the CEO. They state “the presence of the illusory belief that golf playing abilities correlate with shareholder value maximization abilities prompts the relevant decision makers to confer higher pay on CEO’s who are good golfers”. Mr. Hogarth and Mr. Kolev say remuneration decisions “involve a host of tangible and intangible measures ranging from concrete indicators of past performance to the observation of ‘soft’ social skills and even physical appearance. (Blogger note: There have been studies that taller CEO’s also make more money.) Moreover, in the USA golf clubs provide locations in which the relevant actors socialize and can judge each other on a variety of dimensions. In this milieu, then, we suspect that being a good golfer is a positive attribute, generating its own ‘halo’ effect.”

Building Relationships and Making the Deal


Josh Sens in a Golf.com article entitled The 8 Rules of Business Golf says “Golf isn't merely a leisure sport. It's the martini lunch of the modern workforce, the buoyant venue where business gets done”. I think Josh may be a bit enthusiastic, but clearly his point is that the golf course is a great place to get business done. He does suggest you do not talk business before the 5th hole or after the 15th hole.

According to Golf Digest, Jim Crane the current owner of the Houston Astros baseball team had the lowest handicap of any CEO in 2005. In discussing the business opportunities the game provides, Crane said that “nowadays, most of his golf is business-related" and "if you can't close in four hours, you can't sell."
Comic by Andrew Grossman

For those interested in refining their skill at closing a deal on the golf course, this Forbes article provides 19 tips from business golf experts.

Golf May Be Good for Business, but the CRA Does Not Care


As I will detail below, notwithstanding the many deals that originate or are consummated on the golf course, the CRA is not very keen on providing income tax benefits. I wondered why the CRA held this point of view, until I found these comments by Jamie Golombek, Managing Director, Tax and Estate Planning of CIBC Private Wealth Management who wrote the following in the National Post in his May, 2011 article titled,  "Tax law takes 9 iron to golf deductions".                

Jamie notes that the Department of Finance in 1996 said the limitation on the deductibility of golf is “designed to ensure that businesses assume their fair share of the tax burden and to prevent ordinary taxpayers from subsidizing the deduction by businesses of entertainment expenses that are altogether discretionary.” The CRA is of the view that the direct business purposes of golf is "accessory or subordinate to the recreational or personal nature of the..golf activity".

If there is one expense my clients are incredulous about, it is golf related expenses. They cannot believe the restrictions the Income Tax Act places on various golf related expenditures. I detail these restrictions below:

Green Fees and Club Rentals


Expenses incurred for green fees and golf equipment rentals are not deductible under subparagraph
The BBC in his Rickie Fowler attire at Predator Ridge
18(1)(l)(i) of the Act.

Membership Fees and Dues


Subparagraph 18(1)(l)(ii) prohibits the deduction of all membership fees or dues (whether initiation fees or otherwise) in any club whose main purposes is to provide dining, recreational or sporting facilities for its members.

Meals


At one time, the CRA did not allow you to deduct meals at a golf club if they were part and parcel of your golf game, but allowed meals if you were not there to golf, but for a business purpose. That ridiculous rule was, for obvious reasons, later changed.

The current rule is; where there is a business purpose with respect to a meal, reasonable amounts expended for meals and beverages consumed at a golf club are deductible, subject to the 50% limitation in section 67.1 of the Act. As with all meal and entertainment expenses, you should note on the back of the receipt who you took for lunch, dinner or drinks.

As discussed above, there is no dispute that playing golf can lead to increased business sales and increased remuneration. However, the CRA clearly wants you to golf on your own dime – notwithstanding the fact that golf may actually be one of the greatest generators of business and business leads within certain industries.