Alot of people ask me about whether or not they can write off in full their Christmas parties or other social events thrown for their employees.
In short, the answer is yes. In general, all meals and entertainment provided, whether they are for clients, subcontractors, or employees, are 50% deductible.
However, there are certain exceptions to this rule. There are about 8 other special situations this could apply but for this posting we will just talk about your employees and clients.
The short rule.
An exception is granted if an amount incurred for food, beverages or entertainment is generally available to all employees of the payer employed at a particular place of business of the payer. This is intended to allow a full deduction for the costs of a Christmas party or similar event open to all employees at a particular location. The exception will only apply in respect of six or fewer special events held in the calendar year.
In English, you are allowed to have 6 staff meals a year
This is directly stated by the Income Tax Act paragraph 67.1(2)(f)
What counts as a staff meal?
Well, CRA has come out with IT Bulletin 518R that explains their position and reasoning.
Here it states:
Employer-Sponsored Events or Services
Available to All Employees
¶ 9. Under paragraph 67.1(2)(e), the 50% limitation does
not apply if the employer incurs the amount for food,
beverages or entertainment that is generally available to all
its employees at a particular place of business and is
consumed or enjoyed by them. This exempts costs incurred
for a Christmas party or similar event to which all employees
at a particular place of business have access.
Employer-operated restaurants or cafeterias that are available
to all employees at a particular place of business are also not
subject to the 50% limitation. However, subsidized meals
may give rise to a taxable benefit to the employees,
depending on whether or not a reasonable charge is paid ñ
see the current version of IT-470, Employees Fringe
Benefits. Restricted facilities, such as an executive lounge or
dining room, would always be subject to the 50% limitation.
¶ 10. For the purposes of paragraph 67.1(2)(e), a
particular place of business could include a cluster of
buildings, a building or a portion of a building, depending
upon the circumstances. For example, an employer who
occupies one storey of a building in the west of the city and a
building in the east of the city would have two distinct places
of business. On the other hand, an employer who occupies
two or more buildings adjacent to each other might only have
one particular place of business in respect of those buildings,
depending on the surrounding circumstances. If access to the
buildings is restricted for security, safety or other operational
reasons, each of those buildings could be regarded as a
separate place of business.
¶ 11. One example of a location which would generally be
considered a particular place of business is a customers
premises which are located well outside the municipality
where the employers operations are usually centred. Also, a
site that qualifies as a especial work site for the purposes of
subparagraph 6(6)(a)(i), can generally be considered a
particular place of business’ As a result, food, beverages
and entertainment as described in 9 above, that are available
to all of that employers employees working at such a place
of business, would not be subject to the 50% limitation.
¶ 12. For the exception in paragraph 67.1(2)(e) to apply, it
is not necessary for a party or other event to be held at the
place of business; it may be held at a restaurant, rented hall
or other location. The exemption under paragraph 67.1(2)(e)
also applies to the costs of food, beverages and entertainment
for the employees spouses and children, provided these are
offered to spouses and children of all employees. The costs
of food, beverages and entertainment provided to persons
who work at the particular place of business, but not as
employees, and who attend the same generally-available
party or event, are also considered to be exempt under this
provision. This could include owners, partners or
shareholder-managers of the business. If a party or event is
only available to, or is primarily aimed at, selected
employees or the owners, partners, managers or shareholders,
the costs are not exempted from the 50% limitation. On the
other hand, a party or event that is aimed only at employees
of one or more specific divisions within a very large
organization could qualify for the exemption, provided the
event is open to all employees within that division.
¶ 13. The exemption in paragraph 67.1(2)(e) is only
available where the employer either provides the food,
beverages or entertainment directly or makes the
arrangements to provide these things. Allowances and
reimbursements paid to employees who purchase food,
beverages or entertainment are not eligible for this exemption
from the 50% limitation.
In English, this basically states that every employee has to be invited. Also their, spouses and children are allowed to come. Finally, subcontractors that work for the company and bring spouses and children to this event are also included in these rules. Meals and entertainment provided to anyone other than the above would be treated as 50% deductible.
How much can you spend?
For This, CRA has also come out with a position based on some court cases that go through. Your worry here is to not cause a “Fringe Benefit” for your employee.
As explained by CRA:
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/gfts/scl-eng.html
Social events
If you provide a free party or other social event to all your employees and the cost is $100 per person or less, we do not consider it to be a taxable benefit.
Additional costs such as transportation home, taxi fare, and overnight accommodation are not included in the $100 per person amount. If the cost of the party is greater than $100 per person, the entire amount, including the additional cost, is a taxable benefit.
If the benefit is all cash, do not include the GST/HST. However, if all or part of the taxable benefit is non-cash and is not an exempt or zero-rated supply, include the GST/HST in the value of that part of the benefit.
For more information, see Interpretation Bulletin IT-470, Employees’ Fringe Benefits.
Hospitality functions
A hospitality function is where an employer provides a meal or other hospitality services at a work-related function that is not a social event as described above.
Where the purpose of the event is work-related, such as a planning or education session, or a networking session, we consider the primary beneficiary to be the employer, and therefore the event is not taxable.
Where the event is to celebrate the completion of a project or task, or a thanks for a job well done, the benefit is taxable, and must be included in the employee’s income.
I hope that clears up alot of questions that people may have in this area. It seems pretty clear cut that any functions that include customers as well as employees and subcontractors would have to be categorized. The customer portion would only be 50% deductible, and the employees and subcontractors would be 100% deductible (only 6 times a year). There has been cases where companies have tried to include customers in the definitions above, however, I am of the position that unless the Income Tax Act or any related bulletins directly state and include their name, then it doesn’t apply to those people.
If you need to discuss this topic further, I would be more than happy to have a meeting with you about it. Thank you.
