The Bruins couldn't beat the Sens, but here's how they scored on the IRS
While the Boston Bruins may not have won a Stanley Cup since 2011 when they defeated the Vancouver Canucks in Game 7, they achieved an off-ice victory last month when they faced off against the Internal Revenue Service in U.S. Tax Court.
The issue in the case was the deductibility of 100 per cent of the cost of player and staff meals when the Bruins played their away games in city arenas throughout the U.S. and Canada. The Bruins stayed at hotels when visiting away cities and contracted with the hotels to provide the pregame meals to players and team staff. The Bruins’ owners deducted 100 per cent of the cost of the pregame meals at away games, totaling US$256,000 in 2009 and US$284,000 in 2010.
The IRS sent the Bruins’ a deficiency letter that stated that they were liable for an additional US$45,000 in federal taxes for 2009 and US$40,000 in 2010 since, under U.S. tax law, the deduction for meals expense is normally limited to 50 per cent.
U.S. tax rules
The Bruins, however, relied on an exception known as the “de minimis fringe” rule that allows the cost of meals to be 100 per cent deductible if they are not included in employees’ income as a taxable benefit from employment.
Under the U.S. tax code, the term “de minimis fringe” means “any property or service the value of which is … so small as to make accounting for it unreasonable or administratively impracticable.” The law then states that “the operation by an employer of any eating facility for employees shall be treated as a de minimis fringe if such facility is located on or near the business premises of the employer.”
The U.S. Tax Court determined that this requirement was met since the hotels where the Bruins stayed when out of town near the rinks were essentially the places where they were conducting business. As a result, the judge ruled that the de minimis fringe rule exception did, indeed, apply to the out-of-town meals consumed by the Bruins and staff and therefore the cost was found to be 100 per cent tax deductible.
Canadian tax rules
But before Canadian sports teams and, indeed, other employers get too excited about this decision, let’s take a look at our tax rules, which, while similar, would actually result in the opposite ruling.
Prior to 1988, Canada allowed a complete deduction for the cost of business meals (and entertainment.) The White Paper on Tax Reform, released in June 1987 by the Department of Finance, however, changed all this by introducing an 80 per cent deductibility limitation on the cost of business meals because, as former Finance Minister Michael H. Wilson put it, the “tax system ha(d) become a crazy quilt of special incentives, special deductions and special write-offs.” The 80 per cent limitation was justified in the white paper on the assumption that business meals and other entertainment involve an element of personal consumption.
In the government’s 1994 budget, however, in order to make the tax system fairer and “better reflect the personal consumption element,” it further reduced the amount of eligible business meals and entertainment expenses to 50 per cent from 80 per cent, effective after February 1994. This was consistent with the then-recent reduction of business meals and entertainment expense deductions in Ontario, Quebec and the U.S.
While Canadian tax law does have some exceptions that would allow a company to deduct 100 per cent of meals, the exception that the Bruins relied on is not part of our law. In fact, we have the opposite rule which states that an exception to the 50 per cent deduction is available if the food, beverage or entertainment consumed is considered to be a taxable benefit to the employee.
Our law also has various, very specific exceptions, the most well-known being the “holiday party rule,” which allows 100 per cent deduction for up to six events per calendar year where the food, beverages, or entertainment is made available to all employees, even if not all employees attend (but they must be invited.) While the six events are counted on a company-wide basis, the Canada Revenue Agency has stated that simultaneous Christmas parties held in different divisions can count as only one event for the purpose of the six-event limitation on full deductibility.
Another exception is for the food and entertainment industry, whereby, for example, a restaurant could deduct the full cost of servers’ and other staff meals as a business expense.
Over the years, the Canadian tax court has heard various cases challenging the 50 per cent meals limitation. For example, in 2006, a real estate broker was only allowed to deduct 50 per cent of the cost of vouchers for meals, drinks and entertainment that he gave to clients, even though he, personally, did not eat in the restaurants or enjoy the entertainment.
A 2003 case found that the cost of donuts that were given as gifts to clients was fully tax deductible and not limited to 50 per cent as it was not a “meal.” Notwithstanding this decision, however, the CRA’s published view is that gift cards that are usable at a supermarket or gifts of wine or food are all subject to the 50 per cent deductibility rule. The CRA even applies this rule to limit the deductibility to 50 per cent of the cost of coffee and water provided by employers to clients and/or staff.
Even professional foodies or entertainment executives can’t catch a break when it comes to writing off the full cost of meals and entertainment. In 2009, the CRA stated that the 50 per cent limitation applies to a professional food critic’s restaurant meals. Similarly, in 2010, the CRA found that a meal eaten by a restaurant owner to check out a competing restaurant, or a theatre production attended by a theatre director of another company in order to improve his own theatre’s performances are still subject to the 50 per cent limitation.