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Can You Take Off Meals & Entertainment Expenditure?
Wouldn’t life become very easy if expenses incurred by businesses in terms of meals and entertainment were deductible 100 % from our own tax? Unfortunately, that is rarely the situation. This guide clarifies your potential questions on deducting food, beverage and entertainment expenses, and those unique situations where you can claim 100% deduction.
When Meals & Entertainment Expenditure can be Claimed
Entrepreneurs or the self-employed can claim meals, beverages and entertainment expenses, where the sole purpose of these expenses is to earn income from their businesses.
The CRA’s 50 Percent Rule in Relation to Meals & Entertainment
As per the Canada Revenue Agency “The maximum amount you can claim for food, beverages, and entertainment expenses is 50% of the lesser of the following amounts: ü The amount you incurred for the expenses or ü An amount that is reasonable in the circumstances Simply put, the maximum amount you can claim for entertainment, food and beverages expenses is half of either the amount you spend or an amount that makes sense that should be spent on meals and entertainment depending on the circumstances; whichever is less, can be claimed. The 50 % rule is also applicable in such situations where the amount incurred for meals and entertainment:
- Can bed deducted as an expense
- Is an amount inclusive within the other capitalized expenditure. For example, involved in the total cost of property or depreciable assets or
- Is the amount comprised of other expenses such as the cost incurred in scientific experiments or research for the development of businesses, inventory related cost etc.
Also, such other categories or situations where this rule applies is the expenditure made for the food, drink, and entertainment of the employees you hired. E.g. a salesman who worked on commission. Also, the traveling expense incurred for those employees who are working from a different place.
What Should be Treated as Meals and Entertainment?
CRA About Tips & Taxes
According to CRA guidelines, tips and taxes are included in the total of billing items. Taxes are subject to state rules and regulations. For example, the customer relevant to your business having lunch at a restaurant billed as follows: Meals & Drink $50 HST (Ontario_ 13%) $6.50 In addition, the tip amounted to $10, therefore, the total billing to your business customer is 66.50. In this regard, the amount you can claim in your business tax return as expense subject to 50 % of total billing amounted to $33.25.
When can You Claim 100% of the Expenses Incurred in Meals & Entertainment?
You can claim the entire expense incurred for meals and entertainment: 1) If it is a registered charity event organized solely for fundraising purposes where you incurred the expense for meals & entertainment. Note: To be on the safe side the purpose of the registered charity must be to raise funds in the event and not for their regular activities to achieve their goals or targets. 2) In case of expenses incurred in a Christmas party or likely similar events, where all of your workers or employees were invited from a specific location. Note: These events need not be organized at your registered business address. They are likely to be organized at a different place other than your business site e.g. for such events you can arrange a rented site restaurant or other similar locations. Regardless of where you host this event, you can claim 100% of food and entertainment expenses. 3) If the expenses related to meals and entertainment were added to the employee’s income. Note: Employees must not be working from a remote or particular place where business operations are being governed. 4) If you travel by bus, train or by airplane, and the expenses for meals and entertainment were included in travel expenses. Note: If traveling via boat, ferry or ship, the amount for meals and entertainment expenses can only be claimed by up to 50%. 5) When you show meals and entertainment expenses on the bill which you charged to your customer or client, you can claim 100% of such expenses.
Conventions and Seminars?
The rules regarding conventions, conferences and seminars are as follows. When you participate in such events where refreshment is provided that means food, drink and entertainment are available to the participants. The amount charged by the organizers is the participation fee (which includes refreshment fee). You cannot, therefore, claim such fee as meals and entertainment because it doesn’t fall into this category according to the Canada Revenue Agency. But only a $50 expense is treated as meals and entertainment expense and this is subject to the 50 % rule. You, therefore, can only claim 50% of this amount each day which is $25. The above-stated rule doesn’t include such incidental refreshments which are present during the conventions or seminars like juice, tea, coffee, muffins, and doughnuts. According to the CRA, the participation fee for the conference, seminar or similar event is taken as the actual fee paid less the amount payable for entertainment, food, and beverages. This means that your entertainment and food claim has to come from the conference fee. For instance, Canada Revenue Agency quoted “A fee of $500 is paid for attendance at a three-day business conference in 1995. Meals and entertainment are provided to participants, but no amount of the fee is allocated or identified for those services. As a result, subsection 67.1(3) deems $150 to be paid or payable for food, beverages, and entertainment ($50 per day) and to be subject to the 50% limitation. Assuming all other conditions for deductibility are met, the taxpayer may deduct $350 plus 50% of the $150 deemed to be for meals and entertainment ($75). Therefore, the maximum deduction for the conference expense is $425.”
Special Rules for Meals & Entertainment for Some Businesses
The businesses which supply meals and organize entertaining events are not under the rule of 50%; they are subject to deduct 100%. Long-haul truck drivers who incur expenses for meals and entertainment during their travel can claim 80 percent of such amount. Firstly this rule applies when a truck driver drives continuously for at least 24 hours away from home. Secondly, this applies when he is delivering goods to a distance of at least 160 kilometers. Rickshaw drivers and couriers who are self-employed working via bicycle or on foot can claim total expenses which they spend extra for meals (food & drink) within their normal working hours (eight hours). Or a daily fixed rate of $17.50. Note: According to the Canada Revenue Agency it is compulsory to have proper documentation when claiming such expenses as proof that these expenses were incurred to earn business income.