Many business relationships develop over a meal, and most entrepreneurs would readily agree that it’s worthwhile to track meal and entertainment expenses. Despite this, we commonly encounter clients that significantly underutilize the allowable meals and entertainment deductions on their tax returns. For many small business owners, such deductions should constitute a substantial line item on their tax returns. So, let’s get those deductions!
The general rule for deducting meal and entertainment expenses is this: you can deduct up to 50% of the cost of meals and entertainment, or “an amount that is reasonable in the circumstances”—whichever is less. It’s important, however, to understand precisely what types of expense are valid and the percentage of costs that are actually deductible. And you must be prepared to explain how the expense was incurred in the course of your business (you had to incur this expense in order to earn income), so keep track of information such as the attendees of the event/meal, business topics discussed and any other information that would help you link the expense to business activities.
Below, we outline many examples of deductible and non-deductible expenses, along with various guidelines and references that explain the best practices for maximizing your meal and entertainment expense deductions.
The Canada Revenue Agency stipulates that the following are deductible meal and entertainment expenses:
- meals eaten with customers
- tickets for a theatre, concert, or sporting event
- private boxes at sports facilities
- room rentals for an entertainment venue, such as a hospitality suite
- river or ocean cruises
- fashion show admission tickets
- entertaining guests on vacation, or at various types of clubs—bars, athletic, social, and sporting
- taxes, gratuities, and cover charges—as part of entertainment expenses
With respect to meals and entertainment expenses, the following costs are not deductible:
- costs for the use of recreation facilities. or club dues
- season tickets for sporting events (unless satisfactory proof is available that the tickets are a promotional expense)
- meals taken while outside a sales territory, or on a vacation
- meals taken after a golf game (at the club house)
If you’re an employer, you can deduct 100% of the employee meal expenses, since these are not subject to the 50% limit as long as the expenses meet specific criteria.
In some cases, 100% of other meal and entertainment expenses are deductible, including:
- meals and entertainment that are part of compensation to customers—if you are in the business of providing meals or entertainment (as in the case of a restaurant)
- when the meals and entertainment are billed to your customer and itemized on an invoice
- meals provided for working overtime
- For social events, 100% of eligible expenses are deductible for up to 6 events per year. After that, the 50% limit applies. See the CRA Social Events page for other limitations.
Traveling: Remember that there are many allowable deductions for traveling, though you must be aware of the variety of special rules for employers.