Erwin and I believe that if you treat people nice, most of the time, they will also treat you nice as well.
Whenever we visit our tenants, we always try to buy some treats or gift certificates for them to enjoy. Most of our tenants appreciate this gesture. And hopefully they will take good care of our houses.
As a landlord and taxpayer, you may wonder if these gift cards are tax deductible or not?
Generally speaking, any expenses you incur for the purpose of earning income are tax deductible subject to certain limitations.
Limitations, such as subsection 67.1(1), that reduces the meals and entertainment expenses to 50% deduction instead of 100% as a result of human consumptions of food or beverages or the enjoyment of entertainment.
This means that if you take your tenants out for dinner, only half of the meals are deductible. You can spend $50 for both of you, but only $25 is deductible. This is stated in the Income Tax Act to eliminate the personal enjoyment portion of your meals.
You may then wonder if you can deduct 100% of your meals expenses if you purchase restaurant gift cards entirely for the enjoyment of your tenants without any of your participation?
A taxpayer in 2006 had already brought this scenario to court (The Queen v. Stapley, 2006 DTC 6075). The taxpayer was a self employed real estate agent. The taxpayer often bought gift certificates for food and beverages and tickets of various sporting events to his clients. He did not attend the dinners and the sporting events and hence he deducted 100% of the costs.
Initially the Tax Court ruled in favour of the taxpayer, based on the fact that the purpose of subsection 67.1(1) was to eliminate the personal enjoyment component from the deductions and the taxpayer did not participate in any of these events.
Unfortunately, the Minister appealed the decision made by the Tax Court to the Federal Court of Appeal. Based on the literal translation of section 67.1(1), expenses for food, etc. are 50% deductible in respect of human consumption of food and beverages or the enjoyment of entertainment.
Just because the taxpayer did not get to enjoy the entertainment or the food and beverages, someone else did. And just because the objective of section 67.1(1) was meant to eliminate the personal enjoyment portion, the section was not written in such a way that it wouldn’t be applied if there was no personal enjoyment.
The judge reluctantly ruled in favour of the Minister. This means that all the gift certificates issued from a restaurant would be 50% deductible, not 100%.
Furthermore, in 2014, Judicial and CRA Interpretations of Canada Tax Law and Transactional Implication stated that if the gift certificates are issued by the supermarket, a permanent establishment that is primarily engaged in selling food and beverages, section 67.1(1) applies and only 50% of the expenses incurred are deductible.
Say, you are buying a Home Depot gift card, even if you have a home depot promo code, for the purpose of earning the property income, since Home Depot is not an establishment that is primarily engaged in selling food and beverages, you should be able to claim the expenses 100% deductions.
Until next time, happy real estate investment!
Cherry Chan, CPA, CA
Canadian Real Estate Accountant
Julia
Hi Cherry,
Are Ikea gift cards 100% deductible? They can be used for Ikea food court. Any other similar places ideas?
Thank you,
Julia
Cherry Chan, the Real Estate Accountant
Julia, the question to CRA was that if grocery store gift card is fully deductible or only 50% deductible, because the goods supplied by a grocery store is primary food, hence CRA ruled that gift cards from grocery store is only 50% deductible.
Using the same logic, IKEA is primarily supplying furniture, not food. I would say that the gift cards is 100% deductible, provided that the gift cards are used directly to earn the income. Hope this helps.
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andre lacelle
Hello in what section does this fall into and where do you claimit on whar form or box when doing your taxes
Cherry Chan, the Real Estate Accountant
That depends on whether you are deducting it against rental income or business income, and how do you keep track of the accounting information that would provide you useful information.
Vlad M
What about Tim Hortons and Starbucks gift cards? My accountant states that if you can buy mugs and other non-food merchandise this can be 100% deducted. How would CRA look at that?
Cherry
If it is non-food merchandise, it is deductible but you will have to make sure the receipt says so. A general gift card would not work unfortunately, despite the fact that you can buy non-food merchandise with a general gift card.
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One way to get around this while still giving a gift certificate intended for your tenant to enjoy a meal is to buy a gift card to a mall with several restaurants. For example Yorkdale or Eaton Centre. Let your tenants know you would like to have them enjoy a meal at the Cheesecake Factory or Pickle Barrel at Yorkdale…
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sajjad
Fantastic info as always. Is there any difference to the rule of gifting if the real estate is owned under a corporation vs personal?
Cherry Chan
Absolutely. There’re complicated rules in terms of gifting and generally it is considered as a deemed disposition at fair market value.