The Rules for Entertainment and Meal Expenses on Canadian Income Tax

Jan 15, 2024

It would be beneficial for individuals involved in business to have the ability to subtract the entirety of their business-related meal and entertainment costs from their tax payments. Regrettably, it is not often possible to claim a complete 100 percent deduction. In Canada, there exist guidelines regarding the deduction of expenses related to food, drinks, and entertainment for income tax purposes, along with certain specific circumstances where a full 100-percent deduction is permissible.

 

When Can You Claim Entertainment and Meal Expenses?

Self-employed people can claim food, beverage and entertainment expenses when these expenses are incurred for the purpose of earning income from a business or property. Learn more about what is and isn’t considered to be a business expense.

 

What Is the 50-Percent Rule?

 

According to the Canada Revenue Agency (CRA), when it comes to claiming expenses for food, beverages, and entertainment, there is a maximum limit of 50% of the least of the following amounts: the actual expense incurred, or an amount that is considered reasonable based on the circumstances.

This 50% limit applies in situations where the expenses for food, beverages, or entertainment are:

– Otherwise deductible as expenses
– Accounted as part of the cost of land or depreciable property
– Included in the cost of inventory, scientific research and experimental development expenditures, exploration and development expenses, or other costs

Although this information primarily applies to business people and professionals, employees also fall under the 50% limit. This includes commissioned salespersons and employees who are regularly required to work away from their employer’s place of business and have traveling expenses related to food and entertainment.

 

What About Taxes and Tips?

 

When it comes to calculating income tax, it’s important to know that taxes and tips are already included in the overall cost of food and drinks. Additionally, they are subject to the 50-percent rule. As an example, if you were to take a client out to lunch at a restaurant, the bill might be divided as follows:

– Food and beverages: $50.00
– Harmonized Sales Tax (HST) for Ontario at 13%: $6.50
– Tip: $10.00
– Total amount: $66.50
– Deductible expense (50% of the total): $33.25

In this case, the entire bill amount of $66.50 is subject to the 50-percent rule, which means that you can claim $33.25 as a business expense.

     

    When to Claim 100 Percent of Meal and Entertainment Expenses

    In certain situations, it is possible to claim over 50 percent of your expense amount. If you bill your client or customer for meal and entertainment costs and include these expenses on the bill, you can claim 100 percent of them. For instance, if you are a self-employed individual and spend a reasonable amount on meals while away from home, and then bill that amount to a client as an expense related to meals, you can fully deduct the meal expenses. However, the 50% limitation would still apply to the client.

    If you are traveling by plane, train, or bus, and the cost of meals, beverages, and entertainment is included in the travel fee, you can claim 100 percent of these expenses. However, if you are traveling by ship, boat, or ferry, you can only claim 50 percent of the cost for any food, beverages, and entertainment.

    In the case of an employee, if the amount for entertainment and meal expenses is included in their income or would have been included if the employee did not work at a remote or special work location, you can claim the full amount of these expenses.

    For a Christmas party or a similar event where you incur meal and entertainment expenses, and you invite all your employees from a specific location, you can deduct 100 percent of your food and entertainment expenses. It doesn’t matter if the event is held at your place of business or at a different location like a restaurant or rented hall. However, it’s important to note that the guest list must be inclusive and democratic. If the party or event is exclusive to owners, partners, managers, shareholders, or a selected group of employees, your deduction is limited to 50 percent. Additionally, you are only allowed to claim expenses for up to six such events per year.

    If you incur meal and entertainment expenses for a fundraising event that primarily benefits a registered charity, you can claim 100 percent of these expenses. However, it’s vital to exercise caution. This only applies if the event is specifically organized to raise funds, not if it is “part of the regular activities of a registered charity to accomplish its objectives.”

     

     

    What About Conventions and Seminars?

     

    Food and drink costs associated with conventions and seminars that you attend for business purposes are treated in a different manner. It’s important to note that incidental food and beverages are not included in this. In simpler terms, you cannot include the expenses for items such as doughnuts, muffins, juice, coffee, or any other incidental food or beverage that is provided to you.

    In the case where you attend a convention, conference, or seminar where meals or entertainment are provided to you, and none of the fee you pay is specifically designated for those food, meals, or entertainment costs, you must consider $50 per day as an expense for meals and entertainment. However, this is subject to a 50 percent limit, meaning that you can only claim half of this amount, which is $25, for each day.

    Additionally, it’s worth noting that according to the Canada Revenue Agency (CRA), “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.” This implies that your claim for food and entertainment must be subtracted from the conference fee.

     

     

    Businesses With Special Entertainment and Meal Deduction Rules

     

    Businesses engaged in providing food, drinks, or entertainment in exchange for payment, such as restaurants and hotels, are not bound by the 50-percent regulation. They have the privilege to claim complete deductions, totaling 100 percent, for these expenses. However, it is crucial to note that this exemption solely applies to food, beverages, and entertainment that are offered as part of their regular business operations. To illustrate, if you operate a winery and decide to take a client out for lunch, you will only be able to claim 50 percent of the meal expenses.

    Regarding long-haul truckers, they have the right to claim 80 percent of the costs incurred on food and beverages consumed during eligible travel periods. These periods are defined as spans of at least 24 consecutive hours spent away from their place of residence while transporting goods over a distance of at least 160 kilometers.

     

    What qualifies as Entertainment?

     

    Entertainment encompasses a wide range of activities. The Income Tax Act incorporates amusement, recreation, and the enjoyment of entertainment under the term “entertainment.”

    Certain expenses clearly qualify as entertainment expenses, such as the expenditure on tickets for shows or sports events, or the rental cost of a hospitality suite.

    Other expenses, though less obvious, can still be claimed. For instance, the expenses incurred for providing a security escort or a tour guide for a business client.

    All these expenses, along with related costs like taxes, tips, and cover charges (as explained earlier in the Taxes and Tips section of this article), are subject to the 50-percent rule.

    To substantiate that such expenses are directly related to earning income, it is crucial to maintain comprehensive documentation. The Canada Revenue Agency advises individuals to keep records containing the names and business addresses of the entertained customers or individuals, along with pertinent details like locations, dates, times, and amounts, supported by reasonably obtainable vouchers.

    For more information on Food, Beverages, and Entertainment Expenses, consult the Canada Revenue Agency’s Income Tax Interpretation Bulletin IT-518R. Additionally, you may find it helpful to refer to their Convention Expenses guidelines.

     

    How to Claim Meals and Entertainment Expenses on Income Tax in Canada

     

    To complete your T1 income tax return, you need to include your business expenses if you are running your business as a sole proprietorship or partnership. This is done by filling out Form T2125, which is known as the Statement of Business or Professional Income.

    If you’re a Canadian sole proprietor or part of a partnership, and you want more information on income tax related to your business, you can refer to the following resources:

    – Canadian Income Tax and Its Impact on Small Businesses
    – Frequently Asked Questions about Canadian Income Tax for Small Businesses
    – A Guide on Filling out the T1 Canadian Income Tax Form for Business Owners
    – Understanding Capital Cost Allowance Calculation

    However, if your business operates as a corporation, your meals and entertainment expenses should be claimed as part of the operating expenses (8523). This is done when you complete your financial information statement using the General Index of Financial Information (GIFI) on your T2 corporate income tax return.

     

    You can find Contracts and Documents for Business Owners in Canada here businessdocs.ca

     

    Need more information? CBES is here to assist you; feel free to contact us for expert guidance. We will help at all stages and make the process of forming your company as fast and simple as possible.

    Launch Your Business in Canada

    Contact us right now and we will help You!

    Capital Cost Allowance (CCA)

    Capital cost allowance (CCA) is one of several methods to lower your business's taxable income in Canada. The Canada Revenue Agency (CRA) describes it as "a tax deduction that Canadian tax laws allow a business to claim for the loss in value of capital assets due to...

    Motor Vehicle Expense Claims on Income Tax in Canada

    Did you use a vehicle for your business last tax year? This article outlines the motor vehicle expenses you can claim on your income tax in Canada and details the necessary documentation to support your expense claims. The examples provided here illustrate how to...

    Canada Pension Plan (CPP)

    The CPP, also known as the Canada Pension Plan, is a national program that aims to assist Canadians in securing income for their retirement or in the event of disability. It was instituted by Lester B. Pearson's Liberal government in 1965, except in Quebec where a...

    Independent Contractor vs Employee in Canada

    Understanding whether you are classified as an independent contractor or an employee is crucial for your Canadian income tax, especially if you believe you are a contractor but the Canada Revenue Agency (CRA) later decides otherwise after you have filed multiple tax...

    Red Flags That Will Get Your Small Business a CRA Audit

    Receiving a letter from the Canada Revenue Agency (CRA) announcing an audit is something every business or individual fears. Tax experts say about 35,000 such letters were issued in 2023. Business tax returns undergo intense scrutiny, and although there is no...

    How to Manage Business Expense Records in Canada

    Imagine if you were to create a comprehensive list of all the responsibilities necessary for running your business, and then arranged them according to your personal preference. Where would managing business expense records fall within that hierarchy? Would it be...