The Rules for Entertainment and Meal Expenses on Canadian Income Tax
Entertainment and Food Expenses You Can Deduct
As a business person, it would be great if you could deduct 100 percent of all of your business meals and entertainment expenses from your taxes. Unfortunately, the full 100-percent deduction is rarely applicable. There are general rules for deducting food, beverage and entertainment expenses on Canadian income tax, and some special situations where a 100-percent deduction can be claimed.
When Can You Claim Entertainment and Meal Expenses?
What Is the 50-Percent Rule?
"The maximum amount you can claim for food, beverages, and entertainment expenses is 50 percent of either the amount you incur or an amount that is reasonable in the circumstances, whichever is less" according to the Canada Revenue Agency (CRA).
This 50-percent limit applies even when the amounts spent on food, beverages or entertainment are:
- Otherwise deductible as expenses
- Capitalized (for instance, included in the cost of land or depreciable property) or
- Included in the cost of inventory, scientific research, and experimental development expenditures, exploration and development expenses, or other costs
While this information deals with food and entertainment expenses as they apply to business people and professionals, the 50-percent limit also applies to the food and entertainment expenses of employees, such as the expenses of commissioned salespersons and the traveling expenses of employees ordinarily required to work away from their employer’s place of business.
What About Taxes and Tips?
For income tax purposes, taxes and tips are included in the cost of food and beverages and are also subject to the 50-percent rule. So if, for instance, you treated a client to lunch at a restaurant the bill might look something like this:
|Food and beverages||$40.00|
|HST (Ontario - 13%)||5.20|
|Deductable expense (50% of total)||$25.60|
The entire bill amount of $51.20 is subject to the 50-percent rule and you can claim $25.60 as a business expense.
When to Claim 100 Percent of Meal and Entertainment Expenses
There are a few situations where you can claim more than 50 percent of your expense amount. You're allowed to claim 100 percent of your meal and entertainment expenses if:
- You bill your client or customer for the meal and entertainment costs and show these costs on the bill. The Canada Revenue Agency says, "For example, a self-employed individual expends a reasonable amount for meals while away from home. This amount is ultimately billed to a client and is identified in the account submitted to the client as an expense relating to meals. The self-employed individual would be entitled to fully deduct the meal expenses. The 50% limitation would, however, apply to the client."
- You are traveling by plane, train or bus and the cost of meals, beverages, and entertainment is included in the travel fee. It's a different case if you’re traveling by ship, boat or ferry, though; in that case, you can only claim 50 percent of any food, beverages and/or entertainment.
- You include the amount of entertainment and meal expenses in an employee's income or would include them if the employee did not work at a remote or special work location.
- You incur meal and entertainment expenses for a Christmas party or similar event, and you invite all your employees from a particular location. Note that the event doesn’t have to be held at your place of business; if you host an event for all employees at a restaurant, rented hall or other location, you can still deduct 100 percent of your food and entertainment expenses. However, the guest list has to be democratic. If, for instance, your party or event is only available to owners, partners, managers or shareholders and/or selected employees, your expense deductions are limited to 50 percent. Note, too, that you can only claim expenses for six such events a year.
- You incur meal and entertainment expenses for a fund-raising event that was mainly for the benefit of a registered charity. But be cautious; you can only claim 100 percent of these expenses if the event is a fund-raising event, not if the event is "part of the regular activities of a registered charity to accomplish its objectives."
What About Conventions and Seminars?
Food and beverage expenses related to conventions and seminars you attend for business purposes are treated differently. Incidental food and beverages don’t count. In other words, you don’t get to claim the cost of the doughnuts, muffins, juice, coffee or any other incidental food or beverage provided to you.
If you attend a convention, conference or seminar where you are provided with meals or entertainment, and no amount of the fee you pay is specifically allocated to the costs of those food, meals or entertainment, you must claim $50 a day as an entertainment and meal expense, but this is subject to the 50 percent limit, so in reality, you can only claim half of this amount, or $25, each day.
And note that “the fee for the conference, convention, seminar or similar event is deemed to be the actual fee paid or payable minus the amount deemed to have been paid or payable for food, beverages, and entertainment” (CRA). This means that your food and entertainment claim has to be deducted from the conference fee.
Suppose you pay $1,200 to attend a two-day business management conference. There’s no specific reference to the cost of food or entertainment in your registration fee, but you are provided with breakfast, lunch, and dinner each day.
To claim your business deduction for the conference, you need to deduct $50 deemed to be paid for food, beverages, and entertainment each day from the conference fee:
$1,200 – $100 = $1,100
In addition, you can claim 50 percent of the $100 as a meal and entertainment expense ($50).
$ 1,100 + $50 = $1,150 - your maximum deduction for the conference expense.
It's important to know that with expenses related to conferences and seminars, you can only claim expenses for two events in a given year.
Businesses With Special Entertainment and Meal Deduction Rules
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 percent deductions for such expenses. Note though, that this exemption only applies to food, beverages, and entertainment supplied in the regular course of doing business. For example, if you run a winery and take a customer out to lunch, you can only claim 50 percent of your meal expenses.
Long-haul truckers can claim 80 percent of the food and beverages they consume during eligible travel periods, defined as a period of at least 24 continuous hours away from where they live and transporting goods at least 160 kilometers away.
Self-employed foot and bicycle couriers and rickshaw drivers can claim 100 percent of the extra food and beverages they need to consume in a normal eight-hour workday or, for 2006 and later tax years, a daily flat rate of $17.50.
What Counts as Entertainment?
Entertainment covers a broad category of activities. The Income Tax Act includes amusement, recreation and the “enjoyment of entertainment” as entertainment.
Some expenses that would qualify as entertainment expenses are obvious, such as the cost of tickets for performances or sporting events, or the cost of renting a hospitality suite.
Some are less obvious but still claimable, such as the cost of providing a security escort or a tour guide for a business client.
All of these expenses are subject to the 50-percent rule, including related expenses such as taxes, tips and cover charges as explained previously in the Taxes and Tips section of this article.
All such expenses need to be completely documented so that you can prove the expense was directly related to earning income. The Canada Revenue Agency recommends that:
"Records should be maintained of the names and business addresses of the customers or other persons being entertained, together with the relevant places, dates, times and amounts supported by such vouchers as are reasonably obtainable."
How to Claim Meals and Entertainment Expenses
If you are operating your business as a sole proprietorship or partnership, claiming your business expenses is part of completing Form T2125, Statement of Business or Professional Income as part of your T1 income tax return.
For more on income tax for Canadian sole proprietors and partnerships see:
- Canadian Income Tax and Your Small Business Tax
- Canadian Income Tax FAQs for Small Businesses
- How to Complete the T1 Canadian Income Tax Form as a Business
- How to Calculate Capital Cost Allowance
If you are operating your business as a corporation, you will claim meals and entertainment expenses under operating expenses (8523) when you are using the General Index of Financial Information (GIFI) to complete your financial information statement on your T2 corporate income tax return.