What To Do When CRA Demands an Extensive List of Details for Meal Expenses

Extensive list of details | Photo by Charles Kenny http://www.flickr.com/photos/charleskenny/12253092125

When dealing with Meal Expenses, it is a virtual certainty that, at some point, you will find the CRA officer assigned to your case citing IT518r – Food, Beverages and Entertainment Expenses (CRA's Interpretation Bulletin on the subject). Why? Because CRA will use this interpretation bulletin to argue that, unless you can provide an extensive list of details for every meal expense you are claiming, then your meal expenses are not allowable. 

CRA's argument, at-a-glance

Let's take a look at the portion of the interpretation bulletin that a CRA auditor will use to disallow your meal expenses:

Meals and entertainment expenses

For any outlay for entertainment to qualify as a deductible expense, a taxpayer must be prepared to demonstrate that the amount was incurred for the purpose of earning income. Records should be maintained of the names and business addresses of the customers or other persons being entertained, together with the relevant places, dates, times and amounts supported by such vouchers as are reasonably attainableExpenses that are personal in nature are not deductible by virtue of paragraph 18(1)(h). Please refer to the article # 19 of interpretation bulletin (IT518r) for further reference.

The red text in the example above is what CRA is referring to when they ask you to provide details to support your Meal Expenses. So, does this mean that CRA has solid grounds for demanding this degree of detail from you to support your business-related expenses for Food and Beverages? In a word: no.

Canada's tax law - how it really is

In short, CRA's use of interpretation bulletin IT518r to demand an extensive list of details for Meal Expenses is invalid. Here are the main reasons why CRA's argument does not hold water:

  • In IT518r, the reference used by CRA to demand an extensive list of details is found under the heading of "Entertainment". It does not apply to Food and Beverage expenses.
  • CRA Interpretation Bulletins do not have the force of law.
  • Such an extensive list of details is not actually required under the legislation or according to the precedent set by relevant case law. 
  • The eligibility of Meal Expenses is not dependent on the taxpayer's ability to produce this extensive list of details.
  • Meal Expenses are valid if they were incurred for the purpose of earning income. 50% of each meal expense for business purposes can be claimed as a deduction.
  • As long as you have kept records in a form that allows you to determine your tax liabilities, such as identifying which meals were for business and which were not, you should be on solid ground for claiming your meal expenses. However, the more information you keep, the easier it will be for you to assert your eligibility. 

Understanding the law - in greater detail

The Income Tax Act does not actually require an extensive list of details to support Meal Expenses. Let's consider the portions of the Act that would contain such a requirement, if it existed. As you will see, it is nowhere to be found.

1. General Limitations - Subsection 18(1)(h), ITA 

First of all, let's take a look at Subsection 18, beginning with paragraph 18(1)(h). This section is about deductions in general.

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

General limitation

(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;

Personal and living expenses

(h) personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business;

These paragraphs tell us two important things:

  1. A deduction can only be claimed on an expense to the extent that the expense was incurred for business purposes (i.e. gaining or producing income); and
  2. Personal and living expenses cannot be deducted unless they are incurred while traveling away from home on business.

As you will notice, however, Subsection 18 of the Income Tax Act makes no mention of the specific record keeping requirements listed in IT518r. If the law actually required such record keeping requirements, the Auditor should make this clear. 

Let's look at two more sections of the Income Tax Act where extensive record keeping requirements would be mentioned, but aren't.

2. Expenses for Food - Subsection 67.1(1), ITA

Subsection 67 of the Income Tax Act establishes restrictions on the amount you may deduct from each Meal Expense:

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.

Expenses for food, etc.

67.1 (1) Subject to subsection (1.1), for the purposes of this Act . . . an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is deemed to be 50 per cent of the lesser of

(a) the amount actually paid or payable in respect thereof, and

(b) an amount in respect thereof that would be reasonable in the circumstances.

The red text above tells us that, when deducting a Meal Expense, a taxpayer is only allowed to claim a maximum of 50% of the expense as being business-related. The other 50% of "the human consumption of food" is automatically considered to be a personal expense. It is an important restriction to consider when claiming Meal Expense deductions. However, does this subsection of the Income Tax Act also require you to keep detailed lists of records, as stated by the CRA Auditor? No. Let's take a look at one more section, just to be sure.

3. Records and Books - Subsection 230(1), ITA

Subsection 230 of Canada's Income Tax Act would be the most likely place to find this elusive requirement, if it existed.

GENERAL

Records and books

230. (1) Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account (including an annual inventory kept in prescribed manner) at the person’s place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined.

The language of the text in red above is quite informative. The Income Tax Act does not provide any specific instruction on the pieces of information that must be kept by the taxpayer to support a specific kind of expense. Rather, the broad requirement placed upon the taxpayer is merely to keep records that will enable them to determine the taxes they need to pay under the Act.

The form these records should take is, within the bounds of reason, left to the taxpayer. However, this should not be viewed as an excuse to keep poor records. If you are found at some point to have kept insufficient records to determine your tax liabilities under the Act, then the Minister of Revenue (i.e. CRA) actually will have the right to dictate to you precisely how you must keep your books. Still, absent that particular scenario, CRA cannot go beyond the requirements of the Income Tax Act to dictate to you precisely what pieces of information you must provide to support something like Meal Expenses. And, as you may have guessed by now, the requirements listed in IT518r are nowhere to be found in the Income Tax Act.

Conclusion

While both Meal and Entertainment expenses are subject to the 50% limitation on deductions, the extensive list of details specified in Article 19 of IT518r applies only to entertainment expenses, not meal (food and beverage) expenses. Even for Meal Expenses, the list is not legally binding, since such an extensive list of details is not required by the legislation or case law.

In order to support your Meal Expenses, it should be sufficient to provide the name of the person(s) you met with, as well as either the project or contract the meal was associated with or the topics discussed. It is possible to get Meal Expenses allowed with only one of those three pieces of information, and not impossible to have them allowed even without any of that information. But be cautious in your defense, be diligient with the records you keep. There is no reason to make things difficult on yourself if you can avoid it. 

See additional arguments to support your defense when CRA demands an extensive list of details for Meal Expenses. Additionally, see Your Defense in Nutshell below for an example 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. 

Sincerely,

- Audit Self Defense team

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