Question: Are business promotion expenses a legitimate business tax deduction under the Income Tax Act in Canada?
Yes, in Canada business promotion activities are legitimate income tax deductions. If you are a sole proprietor or a partner in a Canadian business, you will claim these expenses on the T2125 form (Statement of Business or Professional Activities) that you file with your T1 income tax return. (Never done it before or want a review? See How to Complete the T1 Canadian Income Tax Form as a Business.)
What Kind of Business Promotion Activities Qualify?
Pretty well any kind you can think of. For example, the costs for:
- Taking a client out for lunch or dinner
- Freebie items for clients such as designer mugs, ball caps, t-shirts
- Giving a seminar or presentation
- Creating flyers, brochures, and business cards
- Sponsoring a non-profit or charitable event such as a tennis tournament (as long as your business receives advertising/promotion at the event)
- Getting a special paint job on your truck that promotes your business
- Tickets for the hockey or baseball game you took your client to
- Having someone dress up as a bear and be a part of a local parade (as long as the costumed bear was actively promoting your business at the time)
- Bringing a box of doughnuts to the office
But There Are Two Catches...
When you're calculating your promotion tax deductions, though, there are two caveats to bear in mind.
1) Advertise Carefully
First, when it comes to advertising as a promotion activity, not all advertising will qualify as a business tax deduction. What is an acceptable business promotion expense under the Income Tax Act depends on what type of advertising you're doing and where you're doing it. Generally, only the cost of advertising in Canadian newspapers, magazines, journals and on Canadian television and radio networks can be deducted.
For instance, if your company placed on ad on a Canadian TV network, you would be able to deduct the entire cost of your promotion expense. But if your business placed an ad with an international broadcast company, you would not be able to claim any of the related promotion expenses.
Claiming expenses for advertising in print publications is even more complicated. Newspapers, magazines and journals are defined as periodicals, according to the Canada Revenue Agency, and two restrictions apply for your advertising expenses to be tax deductible:
- You must be advertising in a periodical distributed by a Canadian media company
- The periodical your company is advertising in must have at least 80 percent original editorial content (content that is not sponsored or based on advertising)
If the periodical your company has advertised in is distributed by a Canadian media company but has less than 80 percent original editorial content, you can claim 50 percent of the cost of your advertisements.
This can be complicated when advertising venues that appear to be Canadian actually aren't. If you want to claim the cost of advertising as a promotion expense, it's best to get into the habit of checking on who actually owns that magazine or TV network first. Just having the word "Canadian" or "Canada" in the title doesn't mean it is!
Online advertising is the exception. In 1996, the government decided that online publications do not fall under the definition of a print or broadcast publication so all online advertising expenses are fully deductible, including banner ads on websites, paid search results, and even your website registration and hosting fees.
2) You Can't Always Claim 100% - Promotion versus Entertainment
Generally, if the business promotion activity is considered entertainment rather than promotion you can only claim half of the expense. For example:
- Most meals - you can only claim 50% of the cost of entertaining prospective clients at business lunches or dinners
- The 50% rule also applies when treating clients to a game or show
- Attending a conference - you can only claim half of your food and beverage expenses
There are five cases where you can claim 100% of a meal or entertainment expense though. And special meals and entertainment rules apply to some types of businesses;
- Long-haul truckers can claim 80% of the food and beverages they consume during eligible travel periods;
- Self-employed foot and bicycle couriers and rickshaw drivers can claim 100% of the extra food and beverages they need to consume in a normal eight hour work day; and
- Businesses that regularly provide food, beverages or entertainment for compensation, such as restaurants or hotels, are exempt from the 50 percent rule and can claim 100% deductions for such expenses.
Deducting Expenses at the Golf Course
In season, many businesses discuss deals with customers over a round of golf. Unfortunately the Canada Revenue Agency (CRA) is very strict about not allowing the deduction of expenses incurred for the use of a golf course - golf is considered to be pleasure rather than legitimate business entertainment. This means that golf membership charges or green fees cannot be deducted at all. The only available deduction is for food and beverages consumed at a golf facility if there is a legitimate business meeting involved, in which case the 50% rule applies. Any meals taken after a golf game at the club house are not deductible (Rita Tully CGA).
(For more on entertainment expenses as business tax deductions, see The Rules for Meals and Entertainment Expenses on Canada Income Tax.)