Lunches and dinner parties can be great ways to woo a client to use your business.
Many times, a business agreement is discussed or finalized with a handshake over coffee, a delicious dinner or a martini (or beer, whatever your taste is).
As a Canadian business owner, you are allowed to deduct 50 per cent of the amount of your expenses for food, beverages and entertainment. You qualify for this deduction as long as the business expenses are incurred to earn income for the business and are considered “reasonable” by the Canada Revenue Agency.
Let’s be honest. Some people are out to increase their business expenses in any way they can. They might take a friend out for lunch, swipe the receipt and say ‘hey, we talked business, right?’
Any entertaining you domust be directly related to the active conduct of your business. You should ensure a business discussion, sales pitch or product demonstration is included, and your dinner guest is a client or, at the very least, a potential client.
It shouldn’t be too extravagant, either. Keep your company’s budget in mind and know that the Canada Revenue Agency will be looking for red flags in your expenses, especially ones that might be considered overboard. Consider that your business expenses are not permitted to cause or increase a loss in your business income.
What kind of entertainment is eligible?
The CRA lets business owners claim attendance at an event of service, provided the experience is for the purpose of earning income.
It can include such recreational activities as:
- Tickets to the theatre, a concert, a sports event or other performance
- Private boxes or suites at sports facilities
- Room rentals, such as a hospitality suite at a convention
- Admission to a fashion show
- Entertaining guests at a night club, on vacation or at an athletic or social club
The taxes, tips or gratuities, and cover charges also fall under the meals and entertainment deduction.
Exceptions to the rule
There are times when you can deduct 100 per cent of your meals and entertainment expenses.
In general, you can claim all of your expenses for the cost of providing meals and recreation for employees who are working at a particular place of business.
That includes, according to the CRA:
- When meals and entertainment are provided as compensation to customers or clients and you are in the business of providing meals and entertainment
- When the meals and entertainment are bill to your customer and itemized on your invoice
- When the expenses are included in an employee’s income, or would be included if the employee did not work at a remote or special work ,location, and the expenses are not for a conference seminar or similar event
- When the expenses are for a party or event to which all employees from a particular location are invited (only six or fewer events are eligible and clients or customers may be invited)
- When meals are provided to employees housed at temporary work camps and the employee cannot be expected to return home daily
- When the expenses are for a fundraising event that benefits a registered charity
What about GST?
If your business is registered to collect GST or HST, you can claim an input tax credit for the portion of the expenses that are deductible for income-tax purposes. For most meals and entertainment, the input tax credit would be for only 50 per cent of the GST paid.
According to the CRA, you can calculate your ITCs for meals and entertainment in two ways:
- Claim 100 per cent ITCs throughtout the fiscal year. If you file monthly or quarterly GST/HST returns, add the 50 per cent adjustment for the excess ITCs you claimed during the year to your net tax calculation for the first reporting period after the end of your fiscal year. If you file annually, add the 50 per cent adjustment to your net tax calculation for that fiscal year. Enter the adjustment on line 104 of your GST/HST return.
- Claim 50 per cent of the actual GST/HST you pay on these expenses during each reporting period. You do not have to make any adjustments at the end of your fiscal year.
And remember …
Keep those receipts.
It also helps to make notations regarding the guest and the purpose of the expense, either in your business ledger, accounting books or event right on the receipt. If you are audited by the CRA, you must be prepared to demonstrate that the amount was incurred for the purpose of earning income.
Can you help?
We’d love to! We specialize in small-business accounting and financial services. Contact one of our tax specialists and we can help you find the tax benefits and deductions available to self-employed individuals and small businesses.
Fill out our contact form or give us a call at 403-226-8297.