Guide to Expensing Meals and Entertainment

One of the biggest questions I get asked on a daily basis is "I can expense that, right?", and 90% of those inquiries are dealing with meals and entertainment.​
 
So you're a business owner, and just like the majority of business owners you see the glorious meals and entertainment deduction line. I know what you're thinking, "I can expense just about any dinner, theatre ticket, or sporting event that involves a client or potential client, right?". 

WRONG. It isn't that straightforward or easy.
 
There are rules, which are essentially saying that if you're enjoying yourself way too much, it's not a deductible expense. Here's 5 rules that you need to remind yourself next time you're considering to expense entertainment expenses.

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1. Business first.

First of all, any meal you provide must be directly related to the activity of your business, or you must provide a directly related discussion that preceded or followed that meal or entertainment. So, for example, if you take me to dinner and we only talk about your aunt's flourishing badminton career instead of forecasting budgets, sales projections, and tax planning strategies, then you're not going to be able to write off the dinner.

If you're entertaining or throwing a party, the same rules apply. Your party's purpose is business activity. Meaning you must include some sort of sales pitch, product demonstration, unveil a new product or service, or even have a related educational speech related to your business.

You can't have an extravagant soiree or meal to just "build goodwill". 
 

2. The CRA can be witty, too.

Whichever environment you choose to hold your entertainment, it must be acceptable to conducting business. For example, you're going to lose your case against the CRA if go to a monster truck rally or football game to have a business conversation. The volumes at the stadium wouldn't allow for a comprehensive discussion.

Also, be careful about overly-boozy situations. Giving a sales pitch or demonstration to a party where most participants have had one too many is quite like talking advanced calculus to 5-year-olds. It's not going to fly. Try to use your professional judgement here.

 
3. Yes, who you invite matters.

The guest list matters as well. You're only able to write-off a specific percentage based on the number of guests you'll be targeting with your activities throughout the night. If you have only invited the general public, or only to employees, you may deduct 100% of the expense.

If you're inviting a large mix of people with different titles to the event, you have to be careful how you allocate your expense here. You're only able to expense a specific percentage.
 
 
4. Thinking of being extravagant?

It is defined in the Income Tax Act that entertainment cannot be "lavish or extravagant." Sure, there's a grey area, and you could potentially argue this all the way through tax court, but why bother? Remember, your time is money.

Bottom line, make sure your entertainment or meal expenses are aligned with your company's budget. If you're a brand new startup, or barely breaking even, you're not going to get away with writing off first-class accommodations.
 

5. Get your defence ready for the big guys.

Keep everything related to your incurred expenses. Keep any evidence pertaining to the event.

For example, if the CRA comes knocking on your doorstep, be prepared to defend any deduction they question. 

Did you throw a party? Make sure you kept the invitations that specifically outlines business purposes. Make sure you have pictures of your guests with the new product. Make sure you record the related business speech you gave during the night. Have your guests sign a book or track your RSVPs so you can accurately allocate the proper percentage of the expenses between anyone that is directly related to your business and those who are not deductible at all.
 
Keep all receipts for all expenses incurred.

For expenses that are less than $75, a record of in your appointment book, amount, location, and the names of those you entertained is suffice. 
 

Bonus:

Things that are not eligible to deduct and set in stone include: dues paid to golf and athletic clubs, hotel clubs, country clubs, and clubs that provide meals while participating in business activities/discussions.