meals vs. entertainment?


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General & AdminThe other day I was working with a client who was setting up their chart of accounts when the Controller asked me:

why do you break out meals from entertainment?

Originally it was because the amounts were taxed differently but it has been so long since I have done a tax return I decided to review the Canada Revenue Agency (”CRA”) Food, Beverages and Entertainment guidance.  Wow, I actually managed to laugh while reading a tax guideline so I thought I’d share.

So, to recap the CRA facts:

Subsection 67.1(1) provides that costs in respect of the human consumption of food or beverages, or the enjoyment of entertainment are deemed to be 50% of the lesser of:

(a) the amount actually paid or payable in respect of these items; and

(b) an amount that would be reasonable in the circumstances to pay for them.

So, as you can see, both meals and entertainment are now 50% tax deductible.  But the interesting piece was the definition of ‘entertainment’.  In the past you used to put meals relating to just an employee in ‘meals expense’ and meals relating to entertaining a customer under ‘entertainment expense’.  Per the CRA guidelines, the items to be included in entertainment expense today should be things like:

Paragraph 67.1(4)(b) includes amusement and recreation as “entertainment.” Section 67.1 also mentions the “enjoyment of entertainment.” This refers to the mere attendance at or experience of the event or service. While not an exhaustive list, the following items are considered to be entertainment expenses and are subject to the 50% limitation:

(a) the cost of tickets for a theatre, concert, athletic event or other performance;

(b) the cost of private boxes at sports facilities;

(c) the cost of room rentals to provide entertainment, such as a hospitality suite;

(d) the cost of a cruise;

(e) the cost of admission to a fashion show;

(f) the cost of entertaining guests at night clubs, athletic, social and sporting clubs and on vacation and other similar trips.
For any outlay for entertainment to qualify as a deductible expense, a taxpayer must be prepared to demonstrate that the amount was incurred for the purpose of earning income and include the names of the customers being entertained.

Fair enough.  Customer dinners are not considered entertainment and should be a meal expense.

The part that made me laugh?

Well, entertainment can include services such as tour guides, security escorts while participating in the enjoyment of entertainment, etc. but the only item the guideline specifically excludes is:

However, payments to what are sometimes called “escort services” for illicit services of a personal nature are never considered to be deductible outlays.

Having known a few sales reps in my time that tried to expense these kinds of “services” (I mean, really, was that lap dance necessary for them to buy our products?!?!?!) - I had a bit of a chuckle that CRA cottoned on to this fact as well and wanted there to be no doubt.  Hah!

For our readers in the United States, the Internal Revenue Service (”IRS”) also has a 50% deductible limitation on meal and entertainment expenses and uses similar definitions as to what entertainment is.  Although, I wonder what the IRS is going to do about these little entertainment expenses.  Of course, we won’t hear that side of the story.  But if it was good enough for Al Capone then …

Both CRA and the IRS have exceptions - there are provisions when meals and entertainment are 100% deductible (e.g. the company Christmas party).  But, to be honest, you probably pushed that to a discretionary spending account like “meeting expense” anyway.

13 comments ↓

#1
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Firemixradio.com
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on 09.02.14 at 6:58 am

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#12
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Knats
on 11.01.15 at 9:45 am

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Strict Standards: Non-static method GA_Filter::ga_parse_comment_link() should not be called statically in /home/tburek/blog.businessready.ca/wp-content/plugins/googleanalytics.php on line 259

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