By Gabrielle Loren, Founding Partner
This time of year, many business owners are getting ready for summer holidays and travel with their family. With any luck, your annual business convention is being held somewhere you’d like to take the whole family. Or perhaps you’re visiting prospective clients while on your family vacation. Or you’re heading out on a reconnaissance mission to do some market research. We’ve heard all these stories and more. And while we don’t judge, CRA definitely does.
Here’s what you need to know about the kind of expenses that can legitimately be claimed and which ones might land you in the kind of hot water you’d rather avoid.
Travel expenses – what can I claim?
- Travel expenses to attend a business conference, up to a maximum of two events per year. These costs can include your flights, hotel, taxis and conference fees. (The keyword here is yours; travel costs for your spouse and children cannot be claimed.) Costs for trips that have both a business and a personal purpose should be allocated between the two purposes.
- Exercise caution on “research travel” — these kinds of costs will be scrutinized by CRA for purpose and results. Travel costs to check out the market in an area where you’re not doing business, and it seems unlikely that you’ll ever do business — whether for comparative purposes or just to see what is “out there” — are not considered sufficient business reasons by the CRA.
Promotion expenses – the gift card glitch
- When you give a client a gift, 100% of the cost of the gift is deductible as an advertising and promotion expense. However, if you give a gift card (to a restaurant or an event) only 50% of the card’s value is tax deductible. In fact, if the gift card is from a store, CRA may take the position that the benefit was conferred … and tax that client on the cash value of the gift card.
- Although there are no written limits for the amount that can be spent on a gift, the amount should be reasonable in relation to the amount of income derived from the client or the referral source. For gift cards, an amount of $25 would usually be considered nominal and should not attract any adverse tax consequences.
Meals and entertainment — the good, the bad and the ugly
- For every dollar spent on meals and entertainment, only half is tax deductible. The idea is that you are benefitting by eating or enjoying the event as well so the CRA will not let you deduct your portion of the cost.
- What this means is that if you take a client out for lunch, you are only able to deduct 50% of that cost for tax purposes. As such, if you spend $40 on the lunch, which includes the tip, the business expense will be $40 but the actual tax expense / write-off is only $20. When summarizing your expenses for your accountant, you want to always book 100% of whatever you spend – your accountant should make the reduction on your tax return.
- The unfortunate impact of the universal 50% reduction is that if you take more than one person to the restaurant or event you are still only able to deduct 50%. In addition, even if you do not attend the event at all the 50% limitation still applies.
- Bringing a dozen doughnuts for the office? Tickets to a BC Lions or Canucks game? Again, these are subject to the 50% deduction.
- There is one exception to the 50% rule that applies only if you have a business with five employees or more. In that case, if you invite all of your employees and their spouses to a celebration event such as a summer party and do not spend more than $100 per person, it is considered more promotion than entertainment — and therefore is 100% deductible. (Keep in mind that staff means unrelated employees so does not include your spouse and children!)
TIP: On each receipt, write the name of the person, the business discussed and if possible, the outcome. For example, “lunch with Bob, got the go-ahead on ABC proposal.”
Conclusion: Stay organized, stay on-side and enjoy a stress-free holiday
The number one way to take advantage of every legitimate tax savings is to keep accurate and detailed records — every receipt and every expense detailed and itemized. That way your professional accountant can help you determine which expenses can be claimed and which cannot.
Now go enjoy your summer. If you need us, we’re here. See you in September!
Gabrielle Loren is the senior founding partner at Loren Nancke & Company. A sought-after speaker on business tax and accounting, Gabrielle is often featured as a financial expert in the local and national media including Global TV, City TV, Financial Post, Vancouver Sun and Canadian Living magazine. You can reach her at 604-904-3807 in Vancouver, British Columbia.