Meals and entertainment expenses are often a significant portion of the advertising budget for businesses. Time spent with clients, potential clients and strategic alliances are a productive way to build relationships which ultimately build business. Often what makes perfect sense to the business owner may not make sense to the tax governing bodies. Understanding the rules will help you make the most of this deduction.
Meals and Entertainment
For the meal to be deductable for tax purposes it must be incurred for the purposes of producing business income. For example, taking a customer out for lunch or to a hockey game strengthens the relationship which is generally considered a valid business expense. Even though the expense is allowed for tax purposes, only 50% of the meal or box seat is deductible. The background to the 50% deduction is that there is a personal element to expense, so CRA restricts the deduction (the HST recovery is also restricted). There are however a few exceptions to the 50% limitation such as certain celebratory events such as Christmas parties*and specific industries such as those in the food industry*(seeIT-518R for additional exemptions).
When claiming meals, it is important to keep adequate documentation which includes the itemized meal receipt and, if paid by credit card, the payment receipt as well which indicates the tip. Submitting a credit card statement only will not get you very far with an auditor.
Memories fade so be sure to make a note on the receipt indicating who joined you for the meal and how it relates to business. Attaching a business card to the receipt is a quick way to accomplish this.
Recent Audit Rulings
Without sufficient proof that the expense is necessary for business purposes, the expense may be denied by the tax department. Recent audits of meals and entertainment expenses denied single meal receipts considering these to be personal in nature (an exception to the single meal receipt is when the meal relates to travel). Another reason to pick up the tab!
As a business owner, you’ll want to make the most of your meals and entertainment budget. Understanding the tax rules will help you get the most out of these expense dollars.