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: Whether the payment of meals of independent contractors is fully deductible to the payor or restricted to 50% under subsection 67.1(1) of the Act.
Position: Question of fact.
Reasons: If none of the exceptions in subsection 67.1(2) of the Act are applicable, the deductibility of the meals is restricted to 50%.
March 11, 2003
XXXXXXXXXX Tax Services Office HEADQUARTERS
Verification and Enforcement Division A. Seidel, CMA
XXXXXXXXXX (613) 957-2058
Attention: XXXXXXXXXX
2003-000374
Food, Beverages and Entertainment
This is in reply to your February 18 and 19, 2003 e-mails concerning the application of subsection 67.1(1) of the Income Tax Act (the "Act") to meals provided to, or incurred by, tour guides.
Background
1. A tour company is in the business of providing guided tours anywhere in the world. The tour company makes all of the arrangements for a tour. A tour package is invoiced as a single amount and includes all of the costs relating to travel to and from the tour location, all meals, all accommodation, a guide, any support vehicle or transportation while on the tour and any admission fees to any special events.
2. The tour company hires guides, on a contract basis, to accompany the tourists. The tour guides are not employees. The tour guides are paid a fixed amount each time they provide a service to the tour company. In addition, the tour company pays for the cost of all meals and accommodation of the tour guide while accompanying the tourists.
3. The tour company also pays for certain pre-trip meals of the tour guides. These meals are for the purpose of sampling various restaurants to ensure that they will meet the requirements of a specific tour. The tour company reimburses the actual expenses of the tour guides for these pre-trip meals. Reimbursement of pre-trip expenses usually covers three days of meals.
Issue
Does subsection 67.1(1) of the Act apply to restrict the deductibility, to the tour company, of the costs incurred to reimburse, or pay for, the meals of the tour guides?
In general, subsection 67.1(1) of the Act limits the deductibility of an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment. The amount deductible for tax purposes is deemed to be 50% of the lesser of the actual amount paid or payable and the amount that would be reasonable in the circumstances.
Subsection 67.1(2) of the Act enumerates the exceptions to subsection 67.1(1) of the Act. Subsection 67.1(4) of the Act specifically provides that no amount paid or payable for travel on an airplane, train or bus is to be considered to be in respect of food, beverages or entertainment.
The paragraph 67.1(2)(f) exception to subsection 67.1(1) of the Act is not applicable in this situation by virtue of the fact that the tour guides are not employees of the tour company. The paragraph 67.1(2)(b) exception to subsection 67.1(1) of the Act is not relevant to this situation.
The paragraph 67.1(2)(d), (e) and (e.1) exceptions to subsection 67.1(1) of the Act do not apply in this situation. Each of these exceptions has a condition that an amount could be required to be included in an employee's income pursuant to section 6 of the Act. Since the tour guides are not employees of the tour company, no amount could be included in their income pursuant to section 6 of the Act.
Paragraph 67.1(2)(c) of the Act provides that subsection 67.1(1) of the Act does not apply to an amount for which the payor is compensated and the amount of the compensation is reasonable and is specifically identified in writing to the person paying the compensation. In this particular situation, the "tourist" is compensating the tour company for the cost of a tour, which compensation would normally be expected to include the cost of the meals of the tour guides, but this cost is not specifically identified to the tourist. The tourist pays one lump-sum amount for the entire tour with itemization of each particular cost incurred by the tour company. It is therefore our view that this exception to subsection 67.1(1) of the Act would not apply.
Paragraph 67.1(2)(a) of the Act provides that subsection 67.1(1) of the Act does not apply to an amount paid or payable for food, beverages or entertainment when it is provided "for, or in expectation of, compensation in the ordinary course of a business carried on by that person of providing the food, beverages or entertainment for compensation". Whether or not an amount is received as compensation in the ordinary course of a business carried on by a person is a question of fact and will be determined after a review of the relevant particulars of any given situation. In general, it is our view that the payment of, or reimbursement of, the cost of the meals of tour guides, provided by a person carrying on business as a "tour company", would be food provided in the ordinary course of its business and that the amount paid by the "tourists" for a particular tour would include compensation for such amounts. Accordingly, it is our view that subsection 67.1(1) of the Act would not apply to the tour guides' meals.
We hope our comments are of assistance. If you wish to discuss any of the above further, or if we can be of any further assistance, do not hesitate to contact us at the above number.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
John Oulton, CA
Section Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
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