What To Do When CRA Claims You Can't Deduct Meal Expenses With Family Members

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CRA might attempt to disallow meal expenses that were incurred with family members, due to your family members being individuals with whom you did not "deal at arm's length".

CRA's argument, at-a-glance

Since Canada's Income Tax Act refers to "arm's length" relationships, and since an auditor might believe that no relationship with a family member could be held "at arm's length", the auditor might choose to disallow a meal expense if it was incurred with a family member.

Canada's tax law - how it really is

Although the Income Tax Act does refer to "arms length" relationship, these relationships exist in the context of a transfer of property or the sale of shares in a corporation. 

The legislation has nothing to say about whether you incur a meal expense with an individual with whom you do not deal at arm's length, such as a family member. It is quite common for family members to have a valid business relationship and for them to hold meetings for business purposes, some of which take place over meals.

For example, consider a case heard in the Tax Court of Canada in 2008.

In Jones v. The Queen, the appellant, Mr. Jones, had a business relationship with his spouse, Ms. Jones, and he claimed meal expenses that he had incurred with her. The auditor assigned to his file had disallowed all of his meal expenses through various tactics, including the one discussed in this section. Here is what Justice G. A. Sheridan said:

I also find reasonable [Ms. Jones'] explanation that as the Appellant’s right arm in the business, she was often accompanied by her young children when assisting her spouse with his business. With the exception of having included amounts for the children’s food, I am unable to agree with the Minister’s disallowance of the expenses claimed.

If you have a legitimate business relationship with a person, the fact that he or she may be related to you is simply a non-issue.

CRA's self-defeating argument

In some cases, the nature of a taxpayer's business relationship with their family member includes the family member paying the taxpayer directly for services rendered. When this happens, CRA considers the money paid to the taxpayer for their work to be taxable income rather than a tax-free gift from a relative. It is utterly inconsistent for CRA to attempt to deny a taxpayer's right to claim business-related expenses incurred with family members, when payments received from these same family members constitute "taxable income". Either two people have a legitimate business relationship, or they don't. If cheques received from a family member as payment for an invoice constitute business income rather than personal gifts, then expenses incurred with a family member for the purpose of earning income constitute valid business expenses, not personal expenses.

Conclusion

There is nothing wrong with claiming valid meal expenses with family members. If the meal expense was incurred "for the purpose of gaining or producing income", as correctly defined in IT487 2(b) (see CRA Claims That Meal Expenses Must Produce Income), then it is a valid business expense, regardless of whom it happened to be held with. If you can show that you have, or are developing, a valid business relationship with the person in question, an auditor's attempt to disallow the expense, merely on the basis that the person is a family member, will ultimately fail.

See Your Defense in Nutshell below for an example of the type 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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