How to Deduct Entertainment & Meal Expenses for Your Business

I am going to start off my blog post with some great news!

First things first, I was finally able to do a rope climb! I’ve never in my life expected myself to be able to climb a rope and I did it this last Thursday!

I expected it to be a lot more demanding physically but turned out the technique is even more important! I was very excited about it!

And one more good news!

Basket Brigade Charity is now official! We just got the letter from Canada Revenue Agency approving our charity application!

This means that we are going to be able to issue donation receipts for all the donations received!

With the ability to issue official charity receipts, we will be able to attract more corporate donations.

This means that we will be able to help even more families and deliver a basket of food to people who are in need during the holidays!

Yay!

Many of us are familiar with the rules that if you incur meals & entertainment expenses for the purpose of earning business or property income, you can claim 50% of the expenses against income subject to certain requirements and a few exceptions.

It got me thinking, since Basket Brigade Charity buys food and delivers them to all the needy families, would the groceries be only 50% deductible as well?

What are the rules surrounding deducting entertainment & meals expenses?

In order to qualify as a deduction (even 50% deduction), you are required to incur the expense for the purpose of earning the business/property income.

So if you take your clients out for lunch, that can be a deductible meal.

If you take your parents out for lunch and they are not your clients, that lunch is not a deductible expense.

Deductible amount can be lower than what you spent!

Most savvy business people are aware that meals & entertainment expenses are only 50% deductible.

Few people know that only 50% of the reasonable amount is deductible.

An example is that you take your top client out and he loves wine. You ended up spending $10,000 on a dinner with a few bottles of expense vintage opened. A typical dinner would cost, say $1,000.

CRA can technically limit your deduction to 50% of the reasonable amount at $1,000 and disallow the claim of the $10,000.

Solo meals are generally not deductible

Many investors ask me this question before. Can I deduct my meals when I am on the road to see properties or visit my clients?

General rule of thumb is that, if you are eating all by yourself, chances are, the meals are not deductible.

As an employee, you may qualify to deduct 100% of it if your employer reimburses your meals and include it as part of your salary.

If your employer doesn’t reimburse your meal and you are under an employment contract and are required to work for more than 12 hours away from your regular work place.

But for most of entrepreneurs out there, solo meals are not deductible, unless you charge it back to your client specify that you are claiming the meals against them.

Otherwise, arrange to have lunch or dinner with a supplier or customer, this can improve your business relationship and you can deduct you meals too!

Restaurant gift cards & grocery gift cards are only 50% deductible

Christmas is getting close. Many of us use this opportunity to thank our clients/tenants by buying bulk gift cards and sending the same as a way of thanks.

Unfortunately restaurant gift cards and grocery store gift cards are only 50% deductible as the underlying products are food and meals.

For more information, see my blog post about this topic.

Meals included as part of the convention cost need to be taken out

Recently, we signed up for a convention next year.

Included in the large convention fees that we pay, they include lunch and dinner.

Although the organizer never splits the price between attending the convention and providing the meals, we, as taxpayers, are supposed to estimate the cost of the lunch and dinner included.

Say convention fees = $2,000, inclusive of lunch & dinner for a two day event.

CRA deems $50 per day is paid and this amount is subject to the 50% limitation.

Deductable convention amount = $2,000 – $50 x 2 days = $1,900.

Deductible meals = $50 x 2 days x 50% = $50

Total deductible expense = $1,950

HST is also subject to the same 50% limitation

You can only claim the 50% of the HST you pay on meals against the HST you collect from your clients.

Say if you incur $100, 13% HST, total bill is $113.

Only $6.50 can be claim as a credit against your HST payable.

Whereas if you spend the same $100 plus HST on office expense, you are eligible to claim the full $13 HST you pay against the HST you collect from your sales.

Employees parties are 100% deductible up to 6 times a year

If you host a party and make it available to all your employees, you can deduct 100% of the expenses.

This includes company picnics and Christmas party up to a total of 6 times a year.

Documentation matters

Visa statements don’t count.

Bank Statements don’t count.

When you get audited, only the actual receipts count!

Keep the actual receipts.

Be diligent at the time when you incur the expense, write down on the receipts who you were with on the receipts. When you get audited 2 years down the road, chances are, you won’t remember who you spent the time with!

As for our Basket Brigade Charity, thankfully, because we are a charity to deliver food to people in need, 100% of our grocery donated can be deductible.

For those of you who would like to host a fundraising event for our charity, food provided at the event is also 100% deductible!

Until next time, happy Canadian Real estate Investing!

Cherry Chan, CPA, CA

Your Real Estate Accountant