MEALS, TRAVEL AND ENTERTAINMENT

Meals, entertainment and travel are among the expenses the CRA reviews most often, because they mix easily with personal spending. This page explains the 50% limit on food, beverages and entertainment, the exceptions to it, the costs that are not deductible at all, and how to treat business trips, conventions and trips that combine business with a holiday.

THE 50% LIMIT

• What it covers: food, beverages and entertainment, including restaurant meals with clients, event tickets, and food and drink at business functions. Only 50% of the lower of the amount paid and a reasonable amount can be deducted.

• Related costs: tips and taxes on a meal are part of the meal and are also limited to 50%.

• Meals while travelling: meals eaten on an out-of-town business trip are subject to the same 50% limit.

• Input tax credits: a GST/HST registrant can claim input tax credits on only 50% of the sales tax paid on meals and entertainment.

• Where to report: the deductible half goes on line 8523 of Form T2125; meals on business trips may be included with travel on line 9200.

EXCEPTIONS TO THE 50% LIMIT

• Billed to a client: where meals or entertainment are provided for a client and the cost is billed to that client and shown on the invoice, the full amount is deductible.

• The product of the business: a restaurant, caterer or entertainment business can deduct in full the food and entertainment it sells to customers.

• Events for all employees: up to six special events a year, such as a holiday party, are fully deductible if all employees at a particular location are invited.

• Charity fundraisers: the cost of attending a fundraising event for a registered charity is not subject to the limit.

• Long-haul truck drivers: 80% of meal costs on eligible trips is deductible.

COSTS THAT ARE NOT DEDUCTIBLE

• Club dues: membership fees for any club whose main purpose is dining, recreation or sport, such as a golf or fitness club, are not deductible.

• Recreational facilities: the cost of using or maintaining a yacht, camp, lodge or golf course is not deductible, even if clients are entertained there. A meal at a golf club with a client remains a meal and is 50% deductible.

• Everyday meals: the proprietor's own meals while working locally, or lunch eaten at the desk, are personal.

• Unreasonable amounts: any part of an expense that is not reasonable in the circumstances is disallowed before the 50% limit is applied.

BUSINESS TRAVEL

• Fully deductible: transportation (air, rail, bus, car rental, taxis), accommodation, and incidental costs such as baggage fees, on a trip taken mainly for business away from the usual place of business.

• Meals: limited to 50%, as above.

• Travelling companions: the costs of a spouse, family member or friend who comes along are personal unless that person has a genuine business role on the trip.

• Records: keep receipts, an itinerary, and a note of the business purpose, the people met and the dates, so the business nature of the trip can be shown.

COMBINING BUSINESS AND PLEASURE

• Main purpose test: if the main purpose of the trip is business, transportation to and from the destination is deductible. If the main purpose is a holiday, it is not.

• Allocating days: accommodation and meals are deductible only for the business days, and for days that cannot reasonably be avoided, such as a weekend between two business days.

• Added holiday days: extra days added for personal reasons are personal, along with any additional travel cost they cause.

CONVENTIONS

• Two per year: the cost of attending up to two conventions a year is deductible, if they relate to the business or profession.

• Location: the convention must be held by an organization within the area that is normal for it. A Canadian organization's convention held outside Canada may not qualify.

• Meals included in the fee: where the fee includes food or entertainment that is not separately shown, $50 a day is treated as meals and entertainment and limited to 50%.

WORKED EXAMPLE

A consultant based in Toronto flies to Vancouver for four days of client meetings, then stays three extra days on holiday.

• Airfare ($700): fully deductible, because the main purpose of the trip was business.

• Hotel ($250 a night): four business nights are deductible, $1,000; the three holiday nights are personal.

• Meals ($80 a day): four business days total $320, of which 50%, or $160, is deductible.

• Client dinner ($240): 50%, or $120, is deductible.

• Total deductible: $700 + $1,000 + $160 + $120 = $1,980.

GIFTS TO CLIENTS

• Reasonable business gifts: gifts to clients or suppliers made to earn business income are deductible if reasonable in amount.

• Food and drink gifts: gifts of food, beverages or event tickets are treated as entertainment and limited to 50%.

KEY POINTS

• Half for food and fun: meals and entertainment are 50% deductible unless an exception applies.

• Club dues never: recreational club memberships and facilities are not deductible.

• Travel follows purpose: transportation is deductible only if business is the main purpose of the trip.

• Document it: who, why, where and when, recorded at the time.

SOURCES

• Income Tax Act: sections 18(1)(l), 20(10) and 67.1.

• Canada Revenue Agency: Guide T4002, Line 8523, Meals and entertainment, and Line 9200, Travel expenses.

• Canada Revenue Agency: Interpretation Bulletin IT-518R, Food, Beverages and Entertainment Expenses.