We guide you through what you can claim and how to avoid trouble with the CRA related to Meals and entertainment deductions in your business.
CONTENTS
- When Can You Deduct Meals and Entertainment Expenses?
- General Deduction Criteria
- Meals and Entertainment Expense Examples
- Meals and Entertainment – Understanding the 50% Rule
- 100% Deductible Meals and Entertainment
- Practical Implications of the 50% Rule
- How to Document Meals and Entertainment Expenses
- Documentation Requirements
- Tools for Documentation
- Avoid Trouble with the CRA
- Travel Meals and the Common Misconception
1. When Can You Deduct Meals and Entertainment Expenses?
General Deduction Criteria
The golden rule here is that you can deduct expenses for meals and entertainment when they’re incurred primarily for the purpose of earning business income. This means that if you’re taking a client out for dinner to discuss a new project, or treating a potential customer to a show in hopes of earning a deal, these expenses are typically seen as directly related to your efforts to earn income. However, not all meals and entertainment expenses meet this criteria. For instance, if you’re just grabbing a burger because you forgot to pack a lunch, or you’re buying season tickets for your favorite hockey team without a clear business purpose, these expenses don’t quite fit the bill. They’re not incurred with the DIRECT intention of earning income, but rather, they fall into personal enjoyment or non-business activities.
Meals and Entertainment Expense Examples
Let’s look at some examples of M&E expenses to make this crystal clear.
Example #1
You and a client discuss business over lunch at your favorite taco spot. You pick up the tab, aiming to build a stronger business relationship and to discuss upcoming projects. This is a classic example of a meal expense, incurred in the pursuit of earning income. If you guessed that it is deductible, you guessed right!
Example #2
You’re working late, and you order pizza just for yourself because the fridge at home is empty. While it might fuel your late-night hustle, this expense isn’t directly tied to earning business income – it’s more about personal sustenance. If you guessed not deductible, good job!
Example #3
Say you’re at a casual pub night, and you end up talking shop with someone who could become a client. You decide to cover their drinks in the spirit of potential business. This might seem deductible, and it likely is, but it’s important to clearly document the business purpose to ensure it meets the CRA’s criteria. If you weren’t sure about this one, that’s perfect. It’s dependent on the situation. Understanding the difference between these scenarios is key to navigating your deductions correctly. It’s not just about whether the meal happens, but why it happens and how it connects to your business income. All that said, even when expenses are eligible, remember they’re often subject to the 50% rule, which we’ll dive into next.
2. Meals and Entertainment – Understanding the 50% Rule
The next thing we’ll find is the rule that often catches business owners by surprise – the 50% deduction rule. So here’s the scoop: even when your meals and entertainment expenses are totally legit and directly tied to earning business income, there’s a cap on how much you can deduct. And that cap is 50% of the total cost. You might be wondering “why 50%?” The idea is that meals and entertainment, by their nature, have a personal enjoyment aspect to them. So, the government says, “Sure, we recognize these costs as business expenses, but we’ll only let you deduct half.” Maybe a bit petty of them, but rules are rules!
100% Deductible Meals and Entertainment
However, like most rules, there are exceptions. And here’s where it gets a little more interesting. Did you know that some meals and entertainment expenses are 100% deductible for your business?
Staff Events
If you’re throwing an event that’s open to ALL OF YOUR EMPLOYEES, like an annual holiday party, you can go ahead and deduct 100% of those costs. You can actually hold up to six of these 100% deductible events each year as long as it’s open to everyone within the business. So inclusive!
Provided as Compensation to Customers
You can also get a 100% deduction on M&E if you’re in the business of selling food and entertainment. For example, if you operate a hotel and you provide breakfast for your guests – those costs are fully deductible.
Expenses Re-Billed to a Client
If you pass the cost of meals and entertainment directly on to a client, and it’s itemized on their bill, you can also deduct 100% of those expenses, since they’re also considered reimbursed costs. This would be like if you operated a PR firm and you hold catered events on behalf of your customers. If you itemize those costs on an invoice to re-bill them to your customer, the related expenses are also 100% deductible for your business. Now, these exceptions might seem like small potatoes, but they can add up to significant savings, especially if you invite all of your staff to the biggest, most expensive events of the year! Plus, you’ll get bonus points with the team! It’s a win-win.
Practical Implications of the 50% Rule
So what does the 50% rule mean in practice? Say you spend $200 taking a client out to dinner, discussing an upcoming project. Under the 50% rule, you can only deduct $100 of that as a business expense on your tax return. It’s important to budget with this rule in mind, especially if meals and entertainment are a big part of how you do business. The last thing you want is to overspend, thinking you’ll get all that money back in deductions, only to find out you’re only getting half.
3. How to Document Meals and Entertainment Expenses
Documentation may be tedious, but it’s your ally when it comes to meals and entertainment expenses. If the CRA decides to take a closer look at your claims, they probably aren’t just going to take your word for it that your dinner with a client was purely for business. They want proof. And that’s where good documentation comes into play.
Documentation Requirements
So, what exactly do you need for your documentation? Well, most of the information can be found on the source document, AKA receipt. It usually has:
- The date of the expense,
- The amount spent,
- The location or establishment, and
- Any sales taxes paid What you’ll also need that isn’t typically included on your receipt is:
- The purpose of the meal or entertainment event – You can write down the business reason for the meal directly there on the receipt if there’s room.
- Who was there – You’ll also want to list the names of the people who attended. If it was a client meeting, include their names and their association with your business. That should give you enough ammunition to prove that the costs were incurred for business purposes.
Tools for Documentation
In today’s digital age, there are plenty of tools and apps designed to make expense tracking and documentation a breeze. Apps like Dext or Expensify allow you to snap a photo of your receipt right away, then add a few notes about the business purpose before it gets stored digitally. This not only saves you from having your own version of the infamous Costanza wallet, but it also makes it easy to find documents for any expense when you need it.
Avoid Trouble with the CRA
The more detailed and organized that your records are, the easier it will be to claim your deductions and defend them if necessary. It might seem like a bit of extra work upfront, but it’s work that pays off by ensuring you’re maximizing your deductions while staying on the right side of the CRA. With that out of the way, you’re well on your way to mastering the art of deducting meals and entertainment expenses for your business.
4. Travel Meals and the Common Misconception
So, there’s a myth floating around that all travel meals are 100% deductible, and I need to set the record straight.
The Real Rule for Travel Meals
The reality is, just like with regular meals and entertainment expenses, the cost of meals while traveling for business typically falls under the 50% deduction rule. Yes, even if you’re miles away from your office, dining alone and discussing business deals on the phone, the cost will still only be 50% deductible. Unfortunately, the underlying principle still remains the same. The government recognizes that there is a personal benefit to these meals, hence the 50% limit. So I’ll say it one more time for the people in the back – travel meals are not 100% deductible just because you’re away from home. And the same rules apply for documentation with travel meals and entertainment, so keep up the good practices even when you’re away on your business trip.