What To Do When CRA Claims That Meal Expenses Must Produce Income

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In attempting to disallow your meal expenses, a CRA auditor may claim that, in order to deduct a meal expense, you must be able to show that you produced income as a result of that particular expenditure.

CRA's argument, at-a-Glance

The portion of the Income Tax Act that an auditor would likely use, in an attempt to reject your claim based on the "must produce income" argument, comes from subsection 18.

DEDUCTIONS

General limitations

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

Notice the red text from subsection 18(1)(a): "for the purpose of gaining or producing income". In order to claim a business deduction on an expense, that expense must have been incurred for the purpose of gaining or producing income. Does this mean that in order to claim a meal expense as a business-related deduction you must be able to prove that you ultimately produced income as a result of that particular expenditure? No, it does not.

Canada's Tax Law - How It Really Is

Let's turn to one of CRA's Interpretation Bulletins, specifically IT487, to find out what CRA's own interpretation of this law is.

From IT487 - General Limitation on Deduction of Outlays or Expenses:

2 (b) "... for the purpose ...". It is not necessary to show that income actually resulted from the particular outlay or expenditure itself. It is  sufficient that the outlay or expense was a part of the income-earning process.

(c) "... gaining or producing income ...". The word "income" refers to income after deductions as computed under Division B of the Income Tax Act. An expense would not be disallowed simply because the income-earning process produced a loss as long as the intention in making the expenditure was to produce income. Outlays or expenses made or incurred to maintain income or to reduce other expenses are also deductible as their purpose would be to increase income, whether or not such an increase resulted.

As you can see, IT487 2(b) shows that it is not necessary for the taxpayer to show that income actually resulted from any particular expenditure. The taxpayer must simply provide some basis for claiming that the expenditure was part of the overall income-earning process and that it was incurred with the intention of ultimately generating income. Further, 2(c) clarifies that the expense cannot be disallowed because it ultimately failed to produce income or even if it generated a net loss. As long as an expenditure is incurred with the intention of either increasing income, maintaining income, or reducing other expenses, it is a valid and deductible business expense.

Conclusion

If a meal expense is incurred "for the purpose (i.e. with the intention) of gaining or producing income", it is a valid business expense, whether income is ultimately generated from the expenditure or not. If an auditor tries to tell you otherwise, he is simply wrong, or dishonest. As long as you can make a reasonable argument for why the amounts you've used to calculate your deduction have some connection to your potential for producing income, you should be on solid ground for deducting a meal expense, and you will almost certainly have the expense allowed in the end.

See Your Defense in Nutshell below for an example of the kind of response you can use in your communication with CRA.

Your Defense In a Nutshell

 

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Sincerely,

- Audit Self Defense team

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