Wouldn't the world be a beautiful place if as business people, we could deduct 100 percent of all the expenses we incur to do business?
Alas, such is not the case and worse, when it comes to potential meals and entertainment deductions on our Canadian income tax, a 100 percent deduction is rare.
This guide explains both the general rules governing food, beverage and entertainment expenses and those special situations where a 100 percent deduction can be claimed.
When Can You Claim Meals and Entertainment Expenses?
Self-employed people can claim food, beverage and entertainment expenses when these expenses are incurred for the purpose of earning income from a business or property. Learn more about what is and isn't considered to be a business expense.)
What Is the 50 Percent Rule?
"The maximum amount you can claim for food, beverages, and entertainment expenses is 50% of either the amount you incur or an amount that is reasonable in the circumstances, whichever is less" (my bolding) (Canada Revenue Agency (CRA)).
This 50 percent limit applies even when the amounts spent on food, beverages or entertainment are:
- otherwise deductible as expenses;
- capitalized (for instance, included in the cost of land or depreciable property); or
- included in the cost of inventory, scientific research and experimental development expenditures, exploration and development expenses, or other costs.
And while this article deals with food and entertainment expenses as they apply to business people and professionals, the 50 percent limit also applies to the food and entertainment expenses of employees, such as the expenses of commission salespersons and the travelling expenses of employees ordinarily required to work away from the employer’s place of business.
What About Taxes and Tips?
Income tax-wise, taxes and tips are included in the cost of food and beverages and are also subject to the 50 percent rule. So if, for instance, I treated a client to lunch at a restaurant and the bill was:
$5.20 HST (Ontario – 13%)
To which I add a $6 tip, the entire amount of $51.20 is subject to the 50 percent rule and I can claim $25.60 as a business expense.
You can Claim 100 Percent of Your Food and Entertainment Expenses If:
1) You bill your client or customer for the meal and entertainment costs, and show these costs on the bill. The Canada Revenue Agency says,
"For example, a self-employed individual expends a reasonable amount for meals while away from home. This amount is ultimately billed to a client and is identified in the account submitted to the client as an expense relating to meals. The self-employed individual would be entitled to fully deduct the meal expenses. The 50% limitation would, however, apply to the client."
2) You are travelling by plane, train or bus and the cost of meals, beverages and entertainment is included in the travel fee.
It's a different case if you’re travelling by ship, boat or ferry, though; in that case, you can only claim 50 percent of any food, beverages and/or entertainment.
3) You include the amount of the meal and entertainment expenses in an employee's income or would include them if the employee did not work at a remote or special work location.
4) You incur meal and entertainment expenses for a Christmas party or similar event, and you invite all your employees from a particular location.
Note that the event doesn’t have to be held at your place of business; if you host an event for all employees at a restaurant, rented hall or other location, you can still deduct 100 percent of your food and entertainment expenses.
However, the guest list has to be democratic. If, for instance, your party or event is only available to owners, partners, managers or shareholders and/or selected employees, your expense deductions are limited to 50 percent.
Note, too, that you can only claim expenses for six such events a year.
5) You incur meal and entertainment expenses for a fund-raising event that was mainly for the benefit of a registered charity.
But be cautious; you can only claim 100 percent of these expenses if the event is a fund-raising event, not if the event is "part of the regular activities of a registered charity to accomplish its objectives".
What About Conventions and Seminars?
1) The first thing you need to know about food and beverage expenses related to conventions and seminars you attend for business purposes is that incidental food and beverages don’t count. In other words, you don’t get to claim the cost of the doughnuts, muffins, juice, coffee or any other “incidental” food or beverage provided to you.
2) The second is that if you attend a convention, conference or seminar where you are provided with meals or entertainment, and no amount of the fee you pay is specifically allocated to the costs of those food, meals or entertainment, you must claim $50 a day as a meal and entertainment expense – but this is subject to the 50 percent limit, so in reality, you can only claim half of this amount, or $25, each day.
And note that “the fee for the conference, convention, seminar or similar event is deemed to be the actual fee paid or payable minus the amount deemed to have been paid or payable for food, beverages and entertainment” (CRA) – meaning that your food and entertainment claim has to be deducted from the conference fee.
For example, suppose you pay $1,200 to attend a two day business management conference. There’s no specific reference to the cost of food or entertainment in your registration fee, but you are provided with breakfast, lunch and dinner each day.
To claim your business deduction for the conference, you need to deduct $50 deemed to be paid for food, beverages and entertainment each day from the conference fee:
$1,200 – $100 = $1,100
In addition, you can claim 50 percent of the $100 as a meal and entertainment expense ($50).
$ 1,100 + $50 = $1,150 - your maximum deduction for the conference expense.
3) The third thing you need to know about expenses related to conferences and seminars is that you can only claim expenses for two a year.
Some Businesses Have Special Meal and Entertainment Deduction Rules
Businesses that regularly provide food, beverages or entertainment for compensation, such as restaurants or hotels, are exempt from the 50 percent rule and can claim 100% deductions for such expenses. (Note though, that this exemption only applies to food, beverages and entertainment supplied in the regular course of doing business. For example, if you run a winery and take a customer out to lunch, you could only claim 50 percent of your meal expenses.)
Long-haul truckers can claim 80% of the food and beverages they consume during eligible travel periods (a period of at least 24 continuous hours away from where they live and transporting goods at least 160 kilometres away).
Self-employed foot and bicycle couriers and rickshaw drivers can claim 100% of the extra food and beverages they need to consume in a normal eight hour work day (or, for 2006 and later tax years, a daily flat rate of $17.50).
What Counts as Entertainment?
All kinds of things. The Income Tax Act includes amusement, recreation and the “enjoyment of entertainment” as entertainment.
Some expenses that would qualify as entertainment expenses are obvious – the costs of tickets for performances or sporting events, or the cost of renting a hospitality suite.
Some are less obvious but still claimable, such as the cost of providing a security escort or a tour guide for a business client.
All are subject to the 50 percent rule, including related expenses such as taxes, tips and cover charges as I explained previously in the Taxes and Tips section of this article.
All such expenses need to be completely documented so you can prove that the expense was directly related to earning income. The Canada Revenue Agency recommends that;
"Records should be maintained of the names and business addresses of the customers or other persons being entertained, together with the relevant places, dates, times and amounts supported by such vouchers as are reasonably obtainable."
For more information on Food, Beverages and Entertainment Expenses see the Canada Revenue Agency's Income Tax Interpretation Bulletin IT-518R.
You may also wish to refer to their IT131R2 Convention Expenses.
How to Claim Meals and Entertainment Expenses
If you are operating your business as a sole proprietorship or partnership, claiming your business expenses is part of completing Form T2125, Statement of Business or Professional Income as part of your T1 income tax return. (Learn more about Form T2125.)
For more on income tax for Canadian sole proprietors and partnerships see:
- Canadian Income Tax and Your Small Business Tax Hub
- Canadian Income Tax FAQs for Small Businesses
- How to Complete the T1 Canadian Income Tax Form as a Business
- How to Calculate Capital Cost Allowance
If you are operating your business as a corporation, you will claim meals and entertainment expenses under operating expenses (8523) when you are using the General Index of Financial Information (GIFI) to complete your financial information statement on your T2 corporate income tax return.
For more on Canadian corporate income tax see:
- Canadian Income Tax FAQs for Small Businesses
- Guide to Income Tax for Canadian Corporations
- Investment Tax Credits for Canadian Small Businesses
- The Small Business Deduction
You may also want to have a look at the other tax information resources on this website, some of which are linked for you in the boxes below.