This series of articles deals with a topic that often gets taxpayers into conflict with the taxman, what a client of mine described as “harassment, conflict and litigation”, which I have shortened to the easy-to-spell HCL. In our self-assessment system (SAS) of tax reporting, we are required to be aware of the rules, and honestly provide the CRA with correct information about our taxes. Most often, tax auditors like to zero in on those deductions that are most easily “miscalculated” by us SAS-ers. That’s because of the strict rules surrounding them, and their potential personal component. I am speaking, of course of meals and entertainment, and automobile expenses (MENTA). This article will discuss the rules surrounding meals and entertainment expenses.
Taking a client out for a meal is a long-standing and acceptable business practice. Traditionally, business-related meals have been deductible in our system. However, there is a 50% restriction on the deduction, in recognition of the fact that there is at least one person (you) enjoying a personal benefit from the arrangement. (In Quebec, there is a further restriction based on a percentage of gross sales.)
What constitutes a business meal to a taxpayer may not always pass muster with the CRA, and here’s where the HCL comes in. For example, there are some tax auditors who simply make the assumption that any meal consumed on the weekend is non-business related and automatically disallowed. Evidence that a meal is business related should include a copy of the restaurant bill, the name of the guest and the business reason for the meal. The burden is on the taxpayer to prove his case on a balance of probabilities.
There are similar rules for entertainment expenses. Sports and theatre tickets are good examples. If you purchase season tickets to a sporting event, for example, you must show the business purpose for the purchase by keeping track of who uses them and their business relationship to you.
Golf is pretty popular in the business world, and the CRA has always known this. That’s why there is a special rule for golf and other such club dues and fees. It’s a simple one: they are not deductible.
But what about business meals at a golf club? Back in 1997, the CRA came up with a policy that meals consumed at the club in conjunction with a game of golf were not deductible. So, as long as you weren’t playing golf, you could go there for a meal. If you played, you had to go somewhere else afterwards to enjoy a nice tax deduction with your meal. The CRA has since seen the silliness of this policy and now allows business meals at a golf club to be deductible (subject to the 50% restriction). Club dues and green fees, however are still off limits.
The meals and entertainment rules have been great fodder for HCL for many years. In one case, the CRA applied the 50% restriction to an investment advisor who routinely gave donuts to his clients to thank them for referring business. The Tax Court of Canada held that donuts did not constitute a “meal”, and allowed the deduction in full. Personally, I can’t imagine the staggering number of Timbits it would take to justify the cost of going to court over this issue, but at least the judge was able to show he was familiar with the basic food groups .
In another case, a food critic, whose sole job it is to eat meals at restaurants was told by the CRA that the 50% restriction applied to her. This illustrates that there are no exceptions to the 50% rule (except, of course the exceptions, which include employee parties and charitable events – but I digress).
In our next article, more HCL with automobile expenses.