At issue
Generally, amounts expended to produce business income are deductible. However, in the case of meals and entertainment, there is a potential that such outlays may be more entertainment than business.
While arguably a tax authority could require a detailed explanation of each expense claim, the more practical approach adopted in most jurisdictions is to simply place a limit on deductibility.
Section 67.1(1) of the Income Tax Act (ITA) Canada
Under our Income Tax Act, the current deduction limit of 50% has been in place since 1994, prior to which it was 80%.
ITA s. 67.1(1) provides that “an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is deemed to be 50 per cent of the lesser of
(a) the amount actually paid or payable in respect thereof, and
(b) an amount in respect thereof that would be reasonable in the circumstances.”
Exceptions to this limitation are noted in the following subsections, including explicit acknowledgement given to long-haul truck drivers.
CRA IT-518R Food, Beverages and Entertainment Expenses
The Canada Revenue Agency (CRA) provides its guidance on the deduction limitation and exceptions in this archived Interpretation Bulletin. Detailed commentary is provided on these potential exceptions:
- Provision of food, beverages or entertainment for compensation
- Fund-raising events for registered charities
- Amounts for which the taxpayer is compensated
- Benefits included in an employee’s income or provided to an employee at a remote work location
- Employer-sponsored events or services available to all employees
- Amounts included in fares for transportation, and Conferences, conventions and seminars
Jacobs v. Commissioner, U.S. Tax Court Docket No. 019009-15
Hockey is an aggressive, competitive game, and the owner of the Boston Bruins appears to be taking the fight from the ice to the courts. In July 2015, Jeremy Jacobs filed a petition challenging the Internal Revenue Service on its interpretation of the meal deduction under the U.S. Internal Revenue Code.
Like Canada, the United States generally limits the deduction for meals and entertainment to 50%. The relevant provision is s.274(n) of the Code.
The core of the Bruins’ argument appears to be that the team is effectively running its business operations when stationed at each out-of-town hotel. The players and other staff are required to attend and participate at meetings, which of course include meals. In that view, the contention would presumably be that the provision of the meals is entirely for the benefit of the employer, and therefore should be entitled to full deductibility.
Practice points
- Meal and entertainment expenses are some of the most often reviewed and reassessed deduction claims. A quick search of reported cases turns up dozens of rulings, and these of course are the ones that ended up in court, with many more being resolved administratively between the taxpayer and CRA.
- The 50% limitation is not applicable in all situations, so a taxpayer could benefit from a review of the exceptions, as discussed in IT-518R.
- On October 8, a Notice of Trial was served in Jacobs v. Commissioner for a hearing to be held March 7, 2016. While foreign decisions have no precedent value in Canada, if the U.S. court finds that the arguments have merit, Canadian businesses – sports franchises or otherwise – may be emboldened to challenge the rules on this side of the border.
