Meals and Entertainment Expenses: Tips and Traps

Many of us already know that if we earn business or employment income, we may be eligible to get a deduction for meals and entertainment expenses as much as 50%. We wish this could be that simple the way it sounds. Even we have spoken with many seasonal tax preparers who also has fallacy about how it can be eligible or what actually need to be done if we want to claim this as an expense. What is the audit risk here?

Yes, there are some simple but mandatory things we can do to eliminate the risk of getting audited and disallowed by auditor. The expenses for food, beverages or entertainment, in order to qualify as a deductible expense, we (taxpayer) must be prepared to demonstrate that the amount was incurred for the purpose of earning income. Canada Revenue Agency insists that records be maintained of the names and business addresses of the customers or other persons being entertained, together with the relevant places, dates, times, business reasons and amounts supported by such vouchers as are reasonably obtainable.

In our experience we found that many taxpayers and their accountants do not give this matter of documentary evidence enough consideration because meals and entertainment expenses are only one half deductible and/or the company qualifies for the small business deduction. But there are greater audit risks exists than just getting a letter from CRA about the disallowed expenses. There is a possibility of double taxation. As an instance, if shareholders are involved, in addition to disallowing the amount as a business expense, an amount may also be added to the shareholders income under subsection 15(1) of the income tax act.

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