Every year, Canada Post receives thousands of letters from children all over the world addressed to Santa Claus. And why not? Santa lives in Canada. It’s the longstanding view of the Canadian government, and Canadians everywhere, that Santa and Mrs. Claus are Canadian citizens and live at the North Pole. In fact, in December, 2013, the Harper government issued Santa and Mrs. Claus Canadian passports, a few weeks after it served notice that it would lay claim to the North Pole as Canadian territory.
Hey, all you need to do is check out Santa’s wardrobe to know that he’s about as patriotic a Canadian as you’ll find. While confidentiality provisions in the Income Tax Act prevent the Canada Revenue Agency from commenting on the specifics of Santa’s tax filings, I was able to speak with the accountant who deals with Santa and Mrs. Claus, and the couple were open to sharing a few insights into their tax affairs and planning. So, let me share a few things I learned.
Northern residents deductions. It should be no surprise that Santa qualifies for the northern residents deductions, which requires Santa to file Form T2222 and consists of two deductions: a residence deduction (worth more than $8,000 for 2019) and a travel deduction (which can be claimed for each eligible trip he makes, the maximum deduction being the cost of the lowest return airfare available at the time of any trips; evidently Santa is in a dispute with the CRA over the travel deduction since he provides his own sleigh).
Santa pays Mrs. Claus a salary. Santa is self-employed and he claims a deduction for the salary paid to Mrs. Claus. He’s careful to pay her an amount that is reasonable for the work she does for him – which is smart income splitting. If you’re going to hire a family member, be sure to have a clearly documented job description and you’d be wise, like Santa, to have a written employment agreement in place. Mrs. Claus’s actual title is director of human resources. It’s a big job making sure the elves are all looked after.
Santa owns rental operations. In case you’re wondering, Santa employees more than 800 elves. That’s quite a work force. Santa has built accommodations at the North Pole for his elves and he charges them nominal rent for these apartments. He pays his staff mostly in “good cheer," and he feeds them, so he doesn’t collect much rent, which has caused some problems with the taxman. The CRA disallowed some of his rental losses because he simply can’t earn a profit on his rental activities because of the below-market rents he charges. So, he has agreed to limit his deductions to the amount of rent he collects.
Santa incorporated in 2016. After years of operating as a sole proprietor, Santa incorporated his operations in 2016. Then, of course, the government introduced its insanely complex rules around the taxation of private corporations in 2017. Mrs. Claus owns 40 per cent of the corporation, and she’s entitled to receive, and pay tax on, dividends on her shares because the business is an “excluded business” since she works more than 20 hours a week in the business. So, the “tax on split income” rules (which normally would cause Santa to pay tax on the dividends) won’t apply to her.
Santa claims his vehicle expenses. Santa does use his vehicle – uh, sleigh – for work purposes, and so he tracks his kilometres travelled in a logbook as the CRA requires, so that he can claim a portion of his sleigh’s costs (insurance, repairs and maintenance, interest on a “sleigh” loan and capital cost allowance).
Santa faces other challenges. Apparently, Santa has had some tax challenges. First, he claimed feed for his reindeer as vehicle expenses – like fuel. CRA disallowed this deduction, but he filed a Notice of Objection and demonstrated that the costs of feeding the reindeer was necessary to the process of earning income. Santa does earn revenue from the licensing of his likeness to Coca-Cola and other companies, and receives royalties from the various associations of shopping mall Santas: the International Brotherhood of Real Bearded Santas and the New England Santa Society, among others. The CRA has struggled to know whether to tax Santa on the value of the gifts he receives (most notably, cookies and milk, but he once received tickets for a Caribbean cruise). So far, the taxman has called these “windfalls” and has not taxed him – but if it can be said that these “gifts” arise from some special skill Santa possesses, he could have a problem.
Adding to the naughty list. Despite his periodic challenges with the CRA, Santa did share that he has partnered with the taxman to ensure that all CRA e-mail and phone scammers will be found on the naughty list starting this year.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.
Tim Cestnick