The Office Christmas Party-and Other Special Occasions

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(Thursday, December 17, 2009)

The Office Christmas Party – and Other Special Occasions

Summary

Most businesses are aware that they can write off some or all of the expenses for employee meals and entertainment such as the office Christmas party, but may not be aware of the rules governing when and how much of the expense can be written off.

The Income Tax Act allows only 50% of most meals and entertainment expense, presumably on the basis that this type of expense contains a personal element, and that to the extent that this is true, no deduction should be allowed in computing taxable income. This restriction is found in Section 67.1, and affects all meals and entertainment expense incurred of any type. The only exceptions are those contained in Section 67.1.

Paragraph 67.1(2)(f) of the Income Tax Act provides that 100% is deductible for amounts paid or payable by an employer for meals and entertainment generally available to all employees at a particular place of business and consumed by those individuals, for up to 6 events a year.

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The provisions of paragraph 67.1(2)(f) seem straightforward at first glance – if a business pays for meals and entertainment for all employees at a place of business, they can deduct 100% of the cost for up to 6 special events per year. What Section 67.1 allows in practice is quite complicated because other sections of the Act affect it, as does CRA administrative policy and a number of court cases. The factors to keep in mind are:

1. Particular place of business could mean a single building, a single office suite or a group of buildings depending on circumstances. A customer’s premises located well outside the city where the employer’s business centers would qualify as a particular place of business for employees working there.

2. Any event or party only for owners or selected employees does not qualify for 100% deduction because it is not available to all employees. However, a party or event for all employees of a division of a large business would qualify.

3. The meals and entertainment do not have to be enjoyed at the place of business, a restaurant or other facility could be used.

4. Special rules are:

− The expenses must be reasonable

− No more than 6 events per year per place of business

− If meals and entertainment are offered to children and spouses of employees, they must be offered to all children and spouses

− Meals and entertainment offered to non-employees such as owners, shareholders or directors who work at the particular place of business also qualify

− Meals and entertainment expenses must be paid by the employer directly, reimbursements and allowances do not qualify

The rules for GST are essentially the same as for income tax. If an expense is denied or subject to the 50% limitation for income tax, it is denied or subject to a 50% limitation for GST purposes. Similarly, if an expense is allowed at 100% for income tax, it will be allowed at 100% for GST purposes.

Like all other expenses, in order to deduct special occasion expenses, you will need to keep receipts, and the expense should be recorded in a separate account, not included with other meals and entertainment expense.

If you are unsure of the deductibility of meals and entertainment expense, talk to your tax accountant.