Entertaining? What are the Rules to Writing Off Hospitality, Meals, and Entertainment?
CRA issued IT 518 to overview their position with regard to the deductibility of food, beverages and entertainment. Reasonable amounts may of course be deducted, if incurred to earn income from a business or property.
The total costs must, however, be restricted to 50% of the amounts actually paid or payable. Note this 50% limitation will not apply to the computation of the personal tax liability on the T1 General in the following cases:
• The claiming of moving expenses using Form T1M
• The claiming of child care expenses using Form T778
• The claiming of medical expenses.
However, it is important to know that the 50% limitation does apply to taxes and tips left as well as to restaurant gift certificates purchased as a gift for your client. The small business owner must be aware of several exceptions to the 50% restriction which will result in 100% claims on his/her Statement of Business or Professional Activities, as discussed below:
• The Hospitality Business. Costs of food, beverages or entertainment provided in the ordinary course of business, which is the business of providing food, beverages or entertainment to others in return for compensation. Restaurants, hotels and airlines, therefore, are all exempt from the 50% restriction on food, beverages or entertainment provided to their customers.
• The Food & Beverage Business. If the business you conduct is the business of making food, beverages or entertainment, the cost of promotional samples is 100% deductible. However, any time you take someone out for a business meal, the costs will be subject to the 50% rules.
• Registered Charities. The 50% restriction will not apply if the food, beverages or entertainment are for a fund-raising event to primarily benefit a charity. The 50% rule will apply to the price of admission to an event that is part of the regular activities of the charity. For instance, Morena invites her client, Gustav, to the annual fund-raising dinner of the Manitoba Theatre for Young People. The expenses in that case are not subject to the 50% rules. Next week, she will be giving Gustav tickets to the group’s five new plays to be held over the next seven months. The cost of those tickets is subject to the 50% rule.
• Consultant’s Billings. If you do work for a company that entails travel or work “on location,” and if the costs of meals are billed to the client and reimbursed to you, you are able to fully deduct those meal expenses, as the reimbursement would be included in your income.
• Meals at Conferences. Where an all-inclusive fee is paid, entitling the participant to food, beverages and/or entertainment, a $50 amount is allocated for each day to be the amount that’s subject to the 50% restriction. All other costs will be fully deductible.
• Beverages en Route. You can fully deduct the cost of any meals and beverages served or entertainment provided on planes, trains or buses (but not ships, boats or ferries), so keep a log of those expenditures, as receipts are normally not available, and CRA will allow a reasonable amount as your claim.
• Employer-Sponsored Events. When you entertain your staff, you’ll be able to avoid the 50% limitation on food, beverages and entertainment, provided that these are generally available to all employees at a particular place and enjoyed by them, like a Christmas party. After February 24, 1998, such events are limited to six per year.
• Employer-Operated Restaurants or Cafeterias. Costs of food and beverages here are not subject to the 50% rule, but subsidized meals do present a taxable benefit to the employees. Restricted facilities like an executive lounge or dining room are always subject to the 50% limitation.
Note that the following activities will qualify as entertainment subject to the 50% rules:
• Tickets to theatre, concerts, athletic events
• Private boxes at sporting events
• Cost of a cruise
• Admission to a fashion show
• Hospitality suites
• Entertaining at athletic or sporting clubs
• Entertaining while on vacation
• Cost of taxes, gratuities and cover charges
• Cost of security escorts
• Cost of escorts or tour guides.*