Wholly Deductibility of Meals and Entertainment Expenses

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(Friday, February 12, 2010)

Deductibility of Meals & Entertainment Expense

Summary

What is your expense for meals? Whatever you paid, right? Not according to Canada Revenue Agency. There are a many special tax rules with regard to meals and entertainment expenses, most of which boil down to either denying the expense for tax purposes entirely, or reducing it to half the actual expense. There are a few occasions, however, when 100% of the expense is deductible.

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The Income Tax Act denies 50% of 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. Employment expenses and business expenses of whatever kind are affected, including capitalized expenses, Scientific Research & Development expense, inventoried expenses, and exploration and development expenses. The only exceptions are those contained in Section 67.1.

100% of the lesser of the actual expense and a reasonable amount is deductible for:

− Amounts paid or payable for food or entertainment in the ordinary course of business of providing food or entertainment for compensation, i.e., restaurants, hotels, and airlines. If a taxpayer’s product or service is food, beverages, or entertainment, the 50% limit does not apply to promotional samples. However, this does not extent to taking customers out for a business meal or entertainment at another business’s premises.

− Amounts for which the taxpayer is compensated for are not limited to the 50% limit, although the person who compensated the taxpayer would be affected. An example would be a consultant who bills the client for meals while traveling – the consultant is not limited to deducting 50% of the cost of the meals, but the client is so limited. Special rules applicable are that the amount claimed as an expense must be the amount compensated, that the amount of the compensation much be reasonable, and that the amount relating to meals and entertainment must be specifically identified in writing to the person paying the compensation.

− When amounts are paid for meals and entertainment for employees, who receive a taxable benefit, the amounts are fully deductible to the employer. If the employees do not receive a taxable benefit because they are at a remote work location, the amounts are also fully deductible to the employer. Where an employer reimburses employees for meals and entertainment expenses, or pays a reasonable allowance to employees for meals and entertainment, the amount reimbursed or the allowance is subject to the 50% rule because it is not a taxable benefit to the employee.

− When amounts are paid or payable by an employer, for meals and entertainment generally available to all employees at a particular place of business, the amounts are fully deductible. This relates to staff parties, etc, for up to 6 occasions a year. There are many special rules regarding this type of expense.

− Amounts included in fares for transportation on an airplane, train or bus are not considered to be paid for meals and entertainment, so they are not restricted. However, meals included in the fare for a ship, boat or ferry would be subject to the restriction.

The rules for GST are essentially the same as for income tax. If an expense is subject to the 50% limitation for income tax, it is 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.

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