As a landlord and taxpayer, you may wonder how to claim tax deductions on gift cards?
Being a landlord myself, I too like to give gift cards to my tenants as a gesture of goodwill. After all, no good deed goes to waste. When you treat your tenants nicely, they will take good care of your home as well.
Generally speaking, any expenses you incur for the purpose of earning income is tax-deductible (subject to certain limitations as specified by the Income Tax Act).
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 favor 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% as tax deductions.
On the other hand, if you purchase a Tim Hortons gift card (restaurant) or a No Frills gift card (grocery store), you may spend $100, but you only get to deduct $50. Only 50% is deductible.
So… when you are selecting your gift card to say thank you this year, you know which ones give you the maximum deduction!
Until next time, happy real estate investment!
Cherry Chan, CPA, CA