Incentives are a way of life, whether it's free sports, concert and theatre
tickets for your best clients, or gift certificates from a fine-dining
restaurant for your top-performing employees. But can you claim these expenses
as valid tax deductions?
Under Canadian tax law, you can deduct legitimate business expenses incurred
for the purpose of earning income from your business, as long as the expenses
are reasonable and are not considered personal or living expenses.
One specific exception to this rule is the restriction that only 50% of the
cost of business meals or entertainment is tax-deductible, in recognition of the
fact some level of personal enjoyment is inherent in the meal being consumed or
the entertainment being enjoyed.
According to the Canada Revenue Agency's Interpretation Bulletin IT-518R
entitled "Food, Beverages and Entertainment Expenses," the cost of a restaurant
gift certificate is considered to be an expense for food or beverages, and as
such is subject to this 50% limitation.
The CRA bases its opinion on the specific wording in the Income Tax Act,
which limits the amount that may be deducted "in respect of the human
consumption of food or beverages or the enjoyment of entertainment." Citing a
1983 Supreme Court of Canada decision that concluded the words "in respect of"
are "words of the widest possible scope," the CRA concludes the phrase is "of
such wide import that it encompasses any cost in respect of the consumption of
food or beverages."
However, a tax case decided last month not only seems to override the CRA's
administrative position, but is particularly noteworthy for the guidance it
provides on how the act is to be interpreted.
The case involved Mark Stapley, a self-employed real estate agent who, in
2000, 2001 and 2002, deducted between $14,000 and $20,000 worth of meals and
entertainment expenses annually. Mr. Stapley did not personally consume any food
or attend any entertainment with his clients, but rather gave his clients
vouchers or tickets, which the clients could use as they saw fit.
Mr. Stapley claimed the full cost of these vouchers and tickets on his tax
returns as fully deductible business expenses incurred to thank his current
clients, who bought and sold homes through him, as well as to encourage his
clients to send him more business.
The CRA reassessed him, only allowing 50% of the amounts he deducted, citing
its published administrative position on restaurant gift certificates based on
the broad interpretation of the phrase "in respect of" meals and entertainment.
The judge, however, disagreed with the CRA's interpretation and concluded Mr.
Stapley's purchases "were for the purpose of, or in respect of, earning income
from his business and not consumption or entertainment."
As the judge wrote, "he might have purchased flowers, food vouchers, a book,
tickets to entertainment, or anything else, or simply given cash; but for him
they were in regard of, or in relation, or in respect, of his earning an
income.... He purchased whatever he thought would bring him business. That is
what the payment was in respect of."
The judge further likened Mr. Stapley's purchase of the food vouchers or
entertainment tickets to "a form of discount" for the purpose of gaining income
or profit, and thus should be fully deductible as a business expense and not
subject to the 50% restriction.
But while this decision may seem like a major victory for taxpayers, bear in
mind it was heard under the "informal procedure" process, and is therefore not
legally binding on other judges (although the decision certainly would be
That being said, the CRA may still decide to appeal the decision, in which
case a higher court would have the chance to establish a new legal precedent.
Colour Photo: Vicki Valerio, Knight Ridder Newspapers; Normally only 50% of the
cost of business meals is tax deductible, in recognition of the fact the person
claiming the expense receives some level of personal enjoyment from the meal.
The cost of food vouchers, however, may be open to interpretation.