Tax Tip for the Month

Meals and Entertainment Expense: One of the common areas of non-compliance uncovered during CRA Audits are adjustments of the taxpayer’s deduction for meals and entertainment. Although the basic principle is straight forward- taxpayers are only allowed to deduct 50% of expenses related to meals and entertainment, there are numerous exceptions.

Non-deductible Expenses – The income tax act specifically disallows a deduction for club dues and the use of a yacht, camp, lodge or golf course. Both initiation and annual membership dues are disallowed. Although memberships at a golf course are not deductible, a portion of golf expenses may qualify for the 50% deduction. The tax rules as they related to golf can be summarized as follows:

Golf memberships - not deductible

Golf fees - not deductible

Meals and beverages – if a meal is consumed in a restaurant or bar at the golf course, 50% of the expenditure would be deductible, as a meal and entertainment expense

Expenditures that are 50% deductible – The 50% restriction applies to the cost of food and beverages, including tips and taxes. This restriction is very broad and includes items such as meals while travelling on company business, coffee and snacks at corporate meetings and food consumed at sporting events while entertaining customers. The definition of entertainment includes:

·         Tickets to the theatre, concerts, athletic events and similar performances

·         Private boxes at sporting facilities

·         Hospitality suites

·         The cost of entertaining guests at restaurants

·         Hunting and fishing trips

If the employer pays meal allowances to employees that travel or overtime meal allowances, these payments are subject to the 50% disallowance. Only 50% of the cost of a gift certificate to a restaurant would be deductible for income tax purposes.

One of the more obscure rules relates to conferences. If a fee is paid to attend a conference, convention or seminar and the cost of meals are broken out separately on the invoice, 50% of the cost of these meals is disallowed. Normally, seminars do not have separate charge for the cost of meals. In such cases, CRA deems the cost to be $50 per day and disallows 50% accordingly. If the conference does not provide meals, but rather supplies coffee, juice and muffins, the $50 per day rule does not apply.

 

GST Addback: The 50% disallowance for meals and entertainment also applies to the GST/HST input tax credit. Companies that are registered under the GST or HST legislation can claim an input tax credit for GST paid on purchases. However, only 50% of the GST/HST paid on meals and entertainment can be recovered.