The Income Tax Act limits most food, beverage and entertainment expenses to 50%, on the theory that some consumption is always personal. Thus, if you take a client (or group of clients) to dinner or a hockey game and spend $400, and your purpose is purely business, you can only deduct $200 from your business income. And if the amount you pay is not “reasonable in the circumstances”, you can deduct only half of the amount that is “reasonable”.
The same rule applies to GST/HST input tax credits — you can claim only half.
In the Stapley case in 2006, a real estate broker was allowed only 50% deduction for vouchers for meals, drinks and entertainment he gave to clients, even though he did not participate in the consumption or enjoyment. The Federal Court of Appeal acknowledged that this was “unfair”, but it is how the law applies.
However, the Tax Court has given taxpayers a break on occasion:
- Caldwell (2003) — the cost of doughnuts given as gifts to clients was allowed in full, as not equating to a “meal”, although
the Income Tax Act actually refers to “food, beverages or entertainment”.
- T. Evans Electric (2002) — a corporation used its plane to take clients on fly-in fishing trips. The Court allowed full GST input tax credits for the plane operating costs, since “entertainment” does not include transportation: “Flying in a noisy little Cessna to get to the fishing may be enjoyable to some, but likely not to most. The fishing starts when you get to the lake.”
However, there are several specific exceptions to the 50% rule, in the legislation:
- Long-haul truck drivers are allowed 80% rather than 50% (because such drivers have no choice about incurring meal expenses).
- If you are compensated (or expect to be) in the ordinary course of your business of providing food, beverages or entertainment for compensation. So if you operate a restaurant, for example, the limitation does not apply to your food costs.
- If you are compensated for the expense, and the compensation is reasonable and specifically identified in writing. Thus, for example, if you are a consultant working on a project for a client and bill $100 for meals as a disbursement, you can deduct the full $100 (and then include it back in income because you have billed it out as part of your fees). But then your client will be subject to the 50% rule when reimbursing you. This exception can also apply to a company that buys food for its employee cafeteria, as long as the prices it charges the employees are above cost and are “reasonable”.
- If the meals or entertainment are provided to an employee under certain conditions, such as where it is a taxable benefit to the employee, or where it qualifies as a remote work site or construction work camp.
- Amounts paid for up to 6 special events a year at which the meals or entertainment are generally available to all employees at that place of business. This covers office parties open to all staff.
- If the cost relates to a fund-raising event, the primary purpose of which is to benefit a registered charity. (The expense must still be a legitimate business expense for the person claiming it.)