In many occasions business relationships are developed over a meal, it is worthwhile to track meal and entertainment expenses.
I commonly encounter clients that significantly underutilize the allowable meals and entertainment deductions on their tax returns. For many small business owners, such deductions should constitute a substantial expense amount on their tax returns.
The general rule for deducting meal and entertainment expenses is this: you can deduct up to 50% of the cost of meals and entertainment, or “an amount that is reasonable in the circumstances”—whichever is less.
It is important, to understand precisely what types of foods and entertainments expense that are valid or invalid to the eyes of the Canada Revenue Agency (CRA).
You must be able to explain how the expense was incurred in the course for your business to earn an income. It is important to keep track of information such as the attendees of the event/meal, business topics discussed and any other information that would help you link the expense to business activities.
The Canada Revenue Agency stipulates that the following are deductible meal and entertainment expenses:
- meals eaten with customers
- tickets for a theatre, concert, or sporting event
- private boxes at sports facilities
- room rentals for an entertainment venue, such as a hospitality suite
- river or ocean cruises
- fashion show admission tickets
- entertaining guests on vacation, or at various types of clubs—bars, athletic, social, and sporting
- taxes, gratuities, and cover charges—as part of entertainment expenses
With respect to meals and entertainment expenses, the following costs are not deductible:
- club dues or costs for the use of recreation facilities
- season tickets for sporting events (unless satisfactory proof that the tickets are a promotional expense)
- meals taken while outside a sales territory, or on a vacation
- meals taken after a golf game (at the club house)
If you’re an employer, you can deduct 100% of the employee meal expenses, since these are not subject to the 50% limit as long as the expenses meet specific criteria.
In some cases, 100% of other meal and entertainment expenses are deductible, including:
- meals and entertainment that are part of compensation to customers—if you are in the business of providing meals or entertainment (as in the case of a restaurant)
- when the meals and entertainment are billed to your customer and itemized on an invoice
- meals provided for working overtime.
- For social events, 100% of eligible expenses are deductible for up to 6 events per year. After that, the 50% limit applies.
You should contact a tax professional, if you have any questions regarding this topic or unsure if you can claim some of those entertainment expenses.
KSF Accounting & Tax Solutions
Nicolas Valcourt, CPA, CMA