24 Aug 5 Tips To Write Off The Christmas Party [Video]
The Canadian “Taxpayer Bill Of Rights1” says that it’s our right, as Canadian Citizens, to “pay no more and no less [tax] than what is required by law”. The days of the three-martini lunches may be long gone (sadly!), but knowledgeable entrepreneurs can still use powerful tax deductions for entertaining the general public, prospects, customers and staff. Here’s how to deduct the cost of food and alcohol the right way.
Tax Tip # 1
For employee parties, meals provided to employees during a company party are 100% deductible. Track these costs separately, under a category called "employee entertainment"”. This way, at tax time, your tax professional won't inadvertently apply the 50% rule applicable to clients and prospects.
Tax Tip #2
Do some business! Any entertaining you do must be directly related to the active conduct of your business or associated with a directly related discussion that preceded or followed the meal or entertainment2. You must conduct business before, during or after the party. That means you need to include a product demonstration, a reveal of a new product or service, a sales pitch or an educational talk related to your product or service.
Tax Tip # 3
Choose your guests wisely! When it comes to writing off party expenses, the guest list matters. You may deduct 100% of your cost if the party is either open to the general public or if it’s for employees and their spouses.
By contrast, if the party is for clients, potential clients and independent contractors who work with you, then you may deduct only 50% of the cost2.
If there is a mix of employees and spouses along with clients and potential clients, you may allocate part of the cost as a 100% write-off and the remainder as a 50% write-off based on the number of guests in each category2.
Finally, if you host a summer barbecue or other get-together for employees, the entire cost (100%) is deductible as long as the entire staff is invited.
Tax Tip # 4
Be reasonable! entertainment can't be "lavish or extravagant”2. Although this is subjective and a gray area that can be argued with an auditor, why bother? Keep it simple. Make sure the entertainment or meal is aligned with your company's budget. If your bottom line is zero, you likely won't be allowed to write-off first-class accommodations for potential clients in town for your party.
Tax Tip # 5
Have a paper trail! Track RSVP’s so you can prove an accurate allocation of the expense between employees, independent contractors, clients, and potential clients and family members and friends who aren't at all deductible. Then, keep all receipts for all expenses incurred.
1CRA, “Taxpayer Bill Of Rights”, RC4417, http://www.cra-arc.gc.ca/E/pub/tg/rc4417/rc4417-13b.pdf
2CRA, “Food, Beverage & Entertainment Expenses”, IT518R, http://www.cra-arc.gc.ca/E/pub/tp/it518r/it518r-e.pdf