Client: Company A paid $179,000 as an initial franchise fee to start a gym franchise. But they didn't go ahead with the business, not because of any fault of theirs, but because of a legal dispute with the franchisor. They couldn't get a refund of the fee. Here are the questions:
Can we spread out the $179,000 franchise fee over five years as blackhole expenditure under tax law? Can we claim the franchise fee and the legal costs from the dispute as a capital loss?
Advisor: Here's what I think:
For spreading out the franchise fee over five years, it's not possible because the law specifically excludes fees related to legal rights, like a franchise agreement. So, no blackhole expenditure here. However, the franchise fee and the legal fees from the dispute can be treated as a capital loss. Franchise fees are part of the costs of starting a business and can lead to a capital loss if the business doesn't happen. Since the dispute is about the franchise, it's also a capital matter. So, both the fee and the legal costs can be treated as a capital loss. The part of the fee that wasn't refunded adds to the cost base, and the legal fees also increase the cost base.
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