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What To Do When CRA Claims Your Expenses Are "Unreasonable", That There Are Too Many of Them, Or That The Dollar Value Is Too High

Expensive restaurant bill - dollar value is too high | Photo by rick

a.k.a. Turning Individual Expenditures Into A Category Expense

CRA might claim that the total number of your individual expenses, or the total dollar value of the expenses considered as a whole, is "unreasonable in the circumstances", and therefore not allowable.

CRA's argument, at-a-glance

When auditors claim that your expenses are not "reasonable in the circumstances", they will usually refer to the following sources to support their arguments:

1) Subsection 67 of the Income Tax Act:

General limitation re expenses

Subdivision f

Rules Relating to Computation of Income

67. In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

2) Interpretation Bulletin IT518r - Food, Beverages and Entertainment Expenses, page 1, under the heading, Summary:

When calculating income, a taxpayer may normally deduct reasonable amounts paid or payable for food, beverages, or entertainment if those amounts are incurred for the purpose of earning income from a business or property or, in certain circumstances, from an office or employment. . . . This bulletin deals with the general limitation on the deduction, the amount capitalized, or the amount included in inventory for a reasonable amount paid or payable for food, beverages, or entertainment, as well as the exception to this general limitation.

3) Interpretation Bulletin IT518r - Food, Beverages and Entertainment Expenses, page 2, under the heading, General:

Subsection 67.1(1) provides that costs in respect of the human consumption of food or beverages, or the enjoyment of entertainment are deemed to be 50% of the lesser of:

(a) the amount actually paid or payable in respect of these items; and

(b) an amount that would be reasonable in the circumstances to pay for them.

It is clear from the Income Tax Act that expenses claimed by a taxpayer do, indeed, have to be "reasonable in the circumstances". Nonetheless, it is possible that an auditor's interpretation of "reasonable under the circumstances" is not correctly supported by tax legislation, and therefore not applicable to your case. 

Canada's tax law - how it really is

In referencing the "reasonableness" of certain expenses, CRA auditors are attempting to mirror the language found in Canada's Income Tax Act, CRA interpretation bulletins, and in other CRA documents. These statements are often interpreted out of context in a way that allows for an entirely subjective and arbitrary determination of what is "reasonable" in the course of a year. Based on his or her personal opinion, a CRA auditor might believe that the total number, or the total value, of your expenses is not reasonable, and therefore all such expenses can legitimately be disallowed. This judgement is subjective and not supported by law.  

When it comes to meal expenses, there are two considerations for any given expense:

  1. Was the expense incurred for the purpose of earning income? 
  2. Was the amount paid reasonable in the circumstances?

If a meal expense was incurred for the purpose of earning income, then the first consideration has been met and the expenses becomes valid and deductible.

In regards to "reasonable in the circumstances", one must determine whether the amount paid on that particular occasion was "reasonable in the circumstances". This is to be determined, not for the purpose of deciding whether or not an expense is to be allowed, but simply for the purpose of identifying what amount will be used in calculating the 50% limitation.

What is "reasonable in the circumstances"?

This is a matter of common sense. For example, if you were treating a long-time client, or trying to court a new one, it would generally be considered reasonable under those circumstances to pay a larger than usual amount for a meal, because you might want to take them to a nice restaurant, or treat them to a nice bottle of wine. Under those circumstances, a total cost of $100-150 would not generally be considered unreasonable. In fact, that would probably be considered to be well within the bounds of reasonableness, and so that amount – the amount actually paid – would be used to calculate the 50% limitation.

However, in a case where you are regularly having to meet with a work associate at a restaurant to work over a meal, it would not be reasonable to constantly be going to expensive restaurants for $150 meals. That would seem to be an attempt to abuse the provision for deducting business-related meal expenses. (On the other hand, it should be noted that this would not be grounds for disallowing the expense in its entirety, because it was still incurred for the purpose of earning income. The proper approach would simply be to determine what would have been reasonable to pay for a meal under those circumstances and use that amount to calculate the 50% limitation.)

A related tactic to beware of: when CRA groups expenses

CRA auditors like to group individual expenditures and then to consider them as a single expense. They might then attempt to connect the total dollar value of the expenses to the "circumstances" of your total income, or the total number of expenses to the "circumstances" of the nature of your business activities.

Let's say that you have gone beyond the requirements of the tax legislation and chosen to record an extensive list of details for all your meal expenses. Having been so diligent in capturing this information, the list of expenses you've provided to the auditor will include the date of the expense, the amount, the restaurant where it was incurred, the name of the person it was with, and either the project it was associated with or the business topic discussed.

If you have provided such extensive list of details, it will be very difficult for an auditor to disallow any specific expense on the grounds that it was not business-related. Still, regardless of the supporting information provided, the auditor may not wish to allow all your meal expenses. In such a case, an auditor might try to group all of your meal expenses together, and then tell you that the total value is "unreasonable" and only allow you a fraction of that total, usually around 25-30%.

There is absolutely no legislative support for such a manoeuvre, but if the taxpayer doesn't know that, it can be quite an effective tactic for minimizing the taxpayer's deductions and maximizing their tax payable, which, in an audit situation, is likely to be sweetened with interest.


Neither the Income Tax Act, nor interpretation bulletin IT518r, give an auditor license to make arbitrary determinations as to what consititutes a reasonable expense, no matter what your total income for the year is, so long as the expenses were incurred for the purposes of producing income. Furthermore, reject any attempt on the part of an auditor to combine all of your individual meal expenses into a single lump-sum category expense. The eligibility criteria and limitations in the Income Tax Act that relate to meal expenses – and really all expenses – are intended to be applied to each expenditure individually

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


This section is for logged-in users only. If you were logged in, you would see an example of a well-crafted response you could use and customize in your own communications with CRA. Simply request an account from us. We will be more than happy to hear from you. 


- Audit Self Defense team

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left Audit Self Defense is committed to making sure you never have to pay more to CRA than you are legally required to, and to making sure you have the tools you need to calmly and effectively deal with CRA if they come calling. Do we want you to win your case? Absolutely! However, Audit Self Defense cannot guarantee successful audit decisions. Nobody can guarantee that.