Business Meals And Entertainment

Entertaining a client or potential client can be expensive. The business can deduct 50% of such costs if reasonable. This 50% rule is in section 67.1 of the Income Tax Act (ITA) and is an arbitrary number representing the government's view of what a personal use and enjoyment portion of the meal or entertainment expense would be. Keeping receipts and making notes as to the purpose of the meeting will help ensure CRA accepts the deduction. Complicating matters is the interaction of GST with the allowable deduction. Click HERE for more.

There are exceptions to the 50% limitation as follows:

1. An amount related to a fund-raising event to benefit a registered charity.

2. An amount paid for food, beverages, and entertainment which is generally available to all employees of the payor. For example a Christmas party.

3. An amount where the payor is reasonably reimbursed and the amount is specifically identified in writing to the person who will repay the amount. For example, a business incurs meals and entertainment and subsequently invoices his customer for the full amount. As long as the invoice clearly identifies the meal or entertainment component, the business can claim 100% of the expense. The other business paying the invoice will then be subject to the 50% limitation. This is generally referred to as a "flow through".

4. An amount required to be included in the income of an employee of the payor as a taxable benefit. This is a complex area and caution should be exercised. A 100% deduction is allowed when the employer has to include the amount paid as a taxable benefit to the employee. An example of this is an amount paid to the employee (other than a salesperson) as an allowance for meals (i.e. not a direct reimbursement of expenses) and the amount was unreasonably high, then the employer can deduct 100% of the amount included as a taxable benefit to the employee as the employee must include in income as a taxable benefit the amount of the unreasonable allowance in excess of a reasonable amount. A reasonable allowance would be one where the amount paid to the employee closely approximates the employee's actual cost. In the case where a reasonable allowance is paid, the allowance is not a taxable benefit and therefore the employer can only deduct 50% of the meals/entertainment. If the allowance has to be included in the employee's income because the excess of the allowance is higher than a reasonable amount then the employee may deduct from his taxes the amount received if the terms and conditions of employment require that the employee incur meals/entertainment - i.e. employee qualifies for employment expense deductions. But the employee can only deduct 50% of the meals/entertainment on his tax return. However, there is an exception to the employee including the unreasonable allowance in excess of a reasonable amount as a taxable benefit where the employee must travel to a Special Work Site or Remote Work Site. The employer can deduct 100% of the meals/entertainment of the excess of the unreasonable allowance over a reasonable allowance and the employee can avoid the taxable benefit because of the special or remote work site exception. If the amount is a direct reimbursement of expenses, then the employee does not receive a taxable benefit and the employer can only deduct 50%. Click HERE for more discussion on this.There are other situations where employees receive taxable benefits or non-taxable benefits related to meals and entertainment but are beyond the scope of this discussion.

Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice. 

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