7 October 2002 Internal T.I. 2002-0159947 - MEALS & ENTERTAINMENT EXPENSES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Whether entertainment expenses incurred by a restaurant to offer a "piano bar" to its patrons are deductible in computing income or subject to the application of subsection 67.1(1) of the Act.

2. Whether meals provided to athletes, while on the road, are deductible in computing income or subject to the application of subsection 67.1(1) of the Act.

Position:

1. Subsection 67.1(1) of the Act does not apply.

2. Subsection 67.1(1) of the Act may apply.

Reasons:

1. The exception in paragraph 67.1(2)(a) of the Act applies.

2. Where the exceptions in subsection 67.1(2) of the Act do not apply, subsection 67.1(1) of the Act will apply.

2002-015994
XXXXXXXXXX A. Seidel, CMA
(613) 957-2058
October 7, 2002

Dear XXXXXXXXXX:

Re: Meals & Entertainment Expenses

This is in reply to your letter dated August 22, 2002, in which you requested our views concerning the deductibility of certain meal and entertainment expenses and the application of subsection 67.1(1) of the Income Tax Act (the "Act") to such expenses.

The particular circumstances in your letter, on which you have asked for our views, appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.

In general, subsection 67.1(1) of the Act provides that 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% of the lesser of the amount actually paid or payable in respect thereof and an amount in respect thereof that would be reasonable in the circumstances. There are specific exceptions to this rule set out in subsection 67.1(2) of the Act.

As stated in paragraph 5 of Interpretation Bulletin IT-518R ("IT-518R"), paragraph 67.1(2)(a) of the Act provides that the 50% limitation does not apply to an amount paid or payable for food, beverages or entertainment if it is provided in the ordinary course of a person's business of providing the food, beverages or entertainment for compensation and that this exempts, for example, restaurants from the 50% limitation if the expenses are incurred to provide food, beverages, or entertainment to paying customers. It is our view that a paying customer, at a restaurant providing food, beverages and entertainment in the form of a "piano bar", is compensating the restaurant in the ordinary course of the business of providing food, beverages or entertainment carried on by the restaurant. Accordingly, by virtue of paragraph 67.1(2)(a) of the Act, subsection 67.1(1) of the Act would not apply to restrict the deductibility of expenses incurred by a restaurant in respect of providing "piano bar" entertainment to paying customers.

This exception would not apply to the situation where a sports team, as employer, is paying its athletes, as employees, a reasonable allowance for meals during "out of town" trips. As stated in paragraph 5 of IT-518R, the exemption in paragraph 67.1(2)(a) of the Act only applies to amounts expended for food, beverages, and entertainment that form part of the taxpayer's product or service. It is our view that the meal allowances provided to team members while they are "out of town" are not expended for food that forms part of the team's product or service. Furthermore, the indirect compensation for these expenses, by the spectators, through the charge for tickets at a sporting venue, would not be considered compensation for food in the ordinary course of the business carried on by the sports team.

Paragraph 67.1(2)(e) of the Act provides that the 50% limitation does not apply where:

(a) the amount was not in respect of a conference, convention, seminar, or similar event;

(b) the allowance would have been included in the employee's income but for subparagraph 6(6)(a)(i) of the Act; and

(c) the amount is paid in respect of a work site in Canada that is not in an urban area of more than 40,000 people and is at least thirty kilometers from such an urban area.

Subsection 6(6) of the Act excludes an allowance from an employee's income when it is received in respect of expenses incurred by the employee for board and lodging during a period at a special work site (hereinafter referred to as the "special work site exclusion"). For the special work site exclusion to apply, all of the following requirements must be met:

(a) the employee must have worked at a special work site, being a location at which the duties performed by the employee were of a temporary nature;

(b) the employee maintained at another location a self-contained domestic establishment as the employee's principal place of residence:

(i) that was, throughout the period, available for the employee's occupancy and not rented by the employee to any other person; and

(ii) to which, by reason of distance, the employee could not reasonably be expected to have returned daily from the special work site; and

(c) the period while the employee was required by his or her duties to be away from the employee's principal place of residence, or to be at the special work site, was at least 36 hours. (Interpretation Bulletin IT-91R4, "Employment at Special or Remote Work Locations" ("IT-91R4") provides additional information on the special work site exclusion.)

While the exception to the 50% limitation in paragraph 67.1(1)(e) of the Act applies in the case of the special worksite exclusion, it does not apply where the allowance for food or beverages is excluded from income under one of the provisions in paragraph 6(1)(b) of the Act.

Subject to specific exceptions, paragraph 6(1)(a) of the Act provides that income from an office or employment includes the value of "benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment". One of the exceptions to paragraph 6(1)(a) of the Act is where all of the requirements of paragraph 6(1)(b)(vii) of the Act are satisfied. Among other things, subparagraph 6(1)(b)(vii) applies where a reasonable allowance for meal expenses is received by an employee (other than one employed in connection with the selling of property or negotiating of contracts for the employer) and the allowance is received for travelling away from the municipality and the metropolitan area (if there is one) where the employer's establishment, at which the employee ordinarily worked or to which the employee ordinarily reported, is located, and the travelling is done in the performance of the duties of the office or employment.

In the situation where an athlete is a member of a team and is paid a reasonable allowance for meals during "out of town" trips, one of the issues to be determined is whether the meal allowance would be excluded from income under subparagraph 6(1)(b)(vii) of the Act or subparagraph 6(6)(a)(i) of the Act. The determination of whether a particular allowance is excluded from income under either subparagraph 6(6)(a)(i) of the Act or subparagraph 6(1)(b)(vii) of the Act can only be made after reviewing all of the facts, including the employment contract, the authority under which the allowance is paid, the nature of the employment, and the frequency and duration of an employee's trips.

A copy of IT-518R and IT-91R4 is available at your local tax services office or may be obtained from our Internet web site (www.ccra-adrc.gc.ca).

Yours truly,

John Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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