Meals and entertainment expenses: the 50% rule explained

What the 50% limit actually says

The CRA allows you to claim up to 50% of the lesser of two amounts: what you actually incurred, and an amount that is reasonable in the circumstances. The second test matters. If a dinner was lavish for the purpose, the reasonable amount can be lower than the receipt, and the 50% is applied to that lower figure.

The limit covers food, beverages and entertainment. Entertainment is read broadly: event tickets and entrance fees, tips, cover charges and room rentals such as hospitality suites all count. The limit also applies to your own meals when you travel or attend a convention, although separate rules can affect those claims.

On the self-employed form T2125, the allowable part goes on line 8523, so you work out the allowable amount first and enter only that figure. Whatever your structure, your bookkeeping should make the full cost and the allowable part easy to tell apart.

A simple illustration

Suppose a consultant takes a client to lunch and the bill is $200 before any sales tax, which was a reasonable amount for the occasion. The deductible amount is 50% of $200, or $100. The other $100 is a real business cost, but it is not deductible. This example is illustrative only.

Now suppose the same lunch cost $200 but only $120 was reasonable for the circumstances. The 50% applies to the lesser figure, so the deduction is $60. Sales tax is left out of both calculations here and is covered separately below.

Exceptions the CRA lists

The CRA states that the 50% limit does not apply in a short list of cases. Your business regularly provides food, beverages or entertainment to customers for compensation, such as a restaurant or hotel. You bill the client for the meal or entertainment and show those costs on the bill. You include the amount in an employee’s income, or would if the employee did not work at a qualifying remote or special work location. Or the expense is for a fund-raising event mainly for the benefit of a registered charity.

Two more apply to employers. An office party or similar event to which you invite all employees from a particular location is not limited, up to six such events a year. Meals provided to an employee housed at a temporary work camp built or installed to provide meals and accommodation at a construction site are also outside the limit, provided the employee is not expected to return home daily.

The remote-location exception carries extra conditions. The amount cannot be paid or payable for a conference, convention, seminar or similar event, and the work location must be at least 30 kilometres from the closest urban centre with a population of 40,000 or more. If you think it applies, confirm the facts with an accountant before relying on it.

Long-haul truck drivers and other special cases

Food and beverages consumed by a long-haul truck driver during an eligible travel period are deductible at 80% instead of 50%. An eligible travel period means a stretch of at least 24 continuous hours spent away from the driver’s home municipality and metropolitan area, driving a long-haul truck with goods to or from a point at least 160 kilometres from home.

Self-employed foot and bicycle couriers and rickshaw drivers can deduct the extra food and beverages they must consume in a normal eight-hour working day because of the nature of the work. The CRA lists a daily flat rate of $23 and expects logbooks showing the days and hours worked. Claiming more than the flat rate requires receipts and a document showing why the extra amount was needed.

Check the CRA page for your tax year before filing, because these figures can be updated.

The matching GST/HST input tax credit limit

If you are a GST/HST registrant, you can generally claim an input tax credit on the GST/HST paid on reasonable meals and entertainment related to your commercial activities, but the claim is limited. The CRA’s eligibility chart shows 50% for most businesses, 100% for charities and public institutions, and 80% for long-haul truck drivers.

As an illustration, assume the $200 lunch above carried $26 of HST. A registrant subject to the 50% limit would claim $13 as an input tax credit, not $26. The CRA also says that when you claim an input tax credit, you reduce the related expense by that amount when you work out the income tax deduction, so keep the two calculations together rather than doing each in isolation.

Two related points. Memberships in clubs whose main purpose is dining, recreation or sport, including golf and fitness clubs, do not qualify for input tax credits unless you acquire them to resell. And if you use the quick method of accounting, you cannot claim input tax credits on operating expenses at all. See the related articles on collected GST/HST for how credits fit into your net tax.

Records that support a claim

A card statement shows that money left your account. It does not show who you met, why, or what was bought. For each meal or entertainment expense, keep the itemized receipt, the date, the people present, and a one-line business purpose written at the time. A note added months later is much harder to rely on.

For input tax credits, the CRA sets documentation requirements that rise with the size of the purchase. Under $100, the receipt needs the supplier’s name, the date and the total. From $100 to $499.99, it also needs an indication of the GST/HST charged and the supplier’s registration number. At $500 or more, it also needs your name, a brief description and the terms of payment. A card slip without the itemized bill often will not meet these requirements.

The CRA generally expects you to keep records for six years from the end of the last tax year they relate to. Keep the receipt, the note and the reconciliation together so that one document answers the questions a reviewer would ask.

Common mistakes and what to discuss with an accountant

The usual problems are claiming the full amount without applying the 50%, recording meals as general office expenses so the limit is missed, mixing personal meals with client meals, and claiming the full input tax credit. Also watch for staff gifts and perks, which can raise different questions and are not the same as a meal for business purposes.

Bring your meals and entertainment ledger, the receipts and notes behind the largest items, details of any employee events and whether any costs were billed to clients. Ask which exception, if any, applies and what evidence supports it. Sora’s bookkeeping and GST/HST services can help set up separate accounts so the allowable part is calculated consistently throughout the year.