No free lunch when it comes to claiming expenses

Tax Tips and Pits - when claiming expenses while entertaining a client, only 50% of that expense is claimable.

As the summer entertainment season quickly approaches, for those running their own business there are ample opportunities to engage clients or customers outside of the office, shop or store.

It is often appropriate to pay for the cost of this entertainment – golfing, boating, fishing, BBQing – for both you and your client or customer. A friendly tax reminder: only 50 per cent of this cost is a legitimate business expense as CRA assumes there is personal benefit that must be accounted for.

If it’s a foursome of golfers, still only 50 per cent can be expensed, not 75 per cent even though you are only a quarter of the foursome – some people like to argue that only their portion of the total participants should be removed, but CRA says no. Only 50 per cent of the entertainment and food costs can be claimed as an expense.

The entertaining of prospective clients also qualifies as a legit expense, but again, only 50 per cent of it. It should be noted though, what traditionally is defined as entertainment expense is actually sometimes deemed a business input and therefore a 100 per cent expense in the eyes of CRA.

If food or entertainment is required to carry on normal business activity, CRA will allow 100 per cent of the expense to be claimed.  For example, a meal would be required during a daylong workshop and the participants (clients) would expect to be fed especially given a short break or remote location.  In fact, two or three meals could qualify.

The regulation reads “… where expenses are incurred for food, beverages or entertainment provided for, or in expectation of, compensation in the ordinary course of a business carried on by that person of providing the food, beverages or entertainment for compensation.”

A business tax tip:  is there any activity or alternative presentation mode you can do or offer as a business owner that would allow you to concurrently conduct business and entertain your clients, and therefore write off 100 per cent of the expense?  Just a thought.

Then there are those experiences for a small business owner when the entertainment doesn’t involve his or her clients.  Instead, the business owner is a client of some other business he’s engaged and in actual fact is having to pay for his or her own entertainment and food as a cost of his or her participating.

The typical example of this involves conventions when the entrance fee includes food and entertainment.

Only half of the portion of the food and entertainment cost can be expensed, and if the figure is not identifiable in the convention fee, $50 per day is the CRA assumed entertainment and food cost, so only $25 can be claimed as an expense. In other words, for each day of participation at a convention, $25 of the convention fee (if it includes food and entertainment) is non-deductible.  When convention fees can range into the thousands, can you say nickel and dime-ing?

Ron Clarke providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca