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.
Principal Issues: Does section 67.1 apply to meal and entertainment expenses incurred for legitimate business purposes to the extent that the expenses are not lavish or extravagant?
Reasons: The wording of the provision is clear. Unless one of the exceptions contained in subsection 67.1(2) applies, subsection 67.1(1) limits the deduction to 50% of the amount otherwise deductible.
November 10, 2004
Mr. Tony Marcogliese HEADQUARTERS
Large File Case Manager Terry Young, CA
Hamilton TSO 613-952-1506
Application of Section 67.1 of the Income Tax Act (the "Act")
We are writing in response to your memorandum of September 27, 2004, concerning the application of section 67.1 of the Act to meals and beverages consumed at business meetings and conventions.
As part of the audit of the XXXXXXXXXX taxation years, the Canada Revenue Agency (the "CRA") has proposed to apply section 67.1 of the Act to certain expenses incurred at XXXXXXXXXX (the "Taxpayer") XXXXXXXXXX Meetings and Conventions. The meetings are attended by various employees of the Taxpayer and representatives of the franchisees. Both the Tax Services Office and the Taxpayer agree that all the meetings have a valid business purpose.
The Taxpayer incurs expenses for food, beverages and entertainment in connection with these meetings that it has fully deducted for income tax purposes. The Tax Services Office has accepted that the amounts are reasonable and deductible, but is of the view that subsection 67.1(1) of the Act applies to limit the deductible amount to 50% of the expenses.
Tax Services Office Position
Subsection 67.1(1) of the Act states:
For the purposes of this Act, other than sections 62, 63 and 118.2, an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment shall be deemed to be 50% 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.
As there is no specific deduction for the expenses in question, the expenses are deductible for the purposes of paragraph 18(1)(a) and section 9 of the Act. Subsection 67.1(1) applies "for the purposes of the Act", which means that it is applicable to the calculation of income from business. The words "in respect of" indicate that the legislators intended that section 67.1 have the widest possible meaning and should not be restrictive. The wording in subsection 67.1(1) is clear and unambiguous in that it applies to amounts "in respect of the human consumption of food or beverages or the enjoyment of entertainment" for the meetings in question. Only if the expenses meet one of the exceptions contained in subsection 67.1(2) of the Act would the 50% restriction not apply. The Taxpayer has not proposed that any of these exceptions are applicable. Therefore, the amount of the deduction is limited to 50% of the expenses incurred.
The Taxpayer presented two arguments in support of its position.
Purpose and Intent of Section 67.1
The Taxpayer is of the view that the purpose of section 67.1 is to limit what the June 1963 Federal Budget Speech referred to as "expense account living" whereby "certain taxpayers seem to be able to eat, drink and entertain on a lavish scale on the basis of what is called a business expense but which is actually financed in large part at the expense of the public revenue." Therefore, the Taxpayer believes that the current section 67.1 is a result of the Government's concern about excessive "expense account living" rather than an attempt to deny a deduction for the personal portion of the expenses.
The primary purpose of the meetings giving rise to the meals and entertainment expenses in question is for business purposes. The meals and entertainment expenses are incurred because of the length of the meeting rather than being the primary purpose of the event. Further, the Government has allowed exceptions to the limitation in subsection 67.1(1) in subsection 67.1(2), which includes events at which the food, beverages or entertainment is generally available to all individuals employed by the taxpayer. This suggests that the Government is not intending to disallow a portion of all meals and entertainment expenses; rather they are focused on "expense account living" approaches whereby a select few employees entertain lavishly under the guise of a business expense.
The Taxpayer also refers to a 1989 article in the Canadian Tax Journal that discussed the effectiveness of section 67.11 , wherein the author argues that section 67.1 should be repealed and replaced by rules that prohibit the deduction of specific entertainment expenses and limit those expenses that are deductible to the extent that they are not lavish or extravagant.
Olympia Floor & Wall Tile [70 DTC 6085]
The Taxpayer is of the view that in Olympia Floor & Wall Tile, the Exchequer Court of Canada held that the fact that an amount may be deductible under one provision of the Act does not mean that it may not also be deductible under another provision of the Act. Specifically, it was found that, although the taxpayer made charitable donations whose deductibility was limited by paragraph 27(1)(a) of the Act as it existed in 1962 and 1963, the expenses could be deducted fully because of another provision of the Act. This logic can be applied to the Taxpayer's meetings expenses in that the amounts were "expenditures incurred to earn income which are not subject to the limitations of section 67.1."
Purpose and Intent of Section 67.1 of the Act
The Courts have stated clearly that where the wording of a provision is clear the wording must be respected. For example, in Shell Canada Limited v. the Queen [99 DTC 5669], the Supreme Court of Canada stated:
Second, it is well established in this Court's tax jurisprudence that a searching inquiry for either the "economic realities" of a particular transaction or the general object and spirit of the provision at issue can never supplant a court's duty to apply an unambiguous provision of the Act to a taxpayer's transaction. Where the provision at issue is clear and unambiguous, its terms must simply be applied:
Although, section 67.1 of the Act may have had its genesis in the 1963 Budget speech, which discussed the perceived abuse of "expense account living", subsection 67.1(1) uses the words "... an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment..." (our emphasis). The wording is clear and broad in application so that it must be interpreted to mean that the provision applies to all food, beverages and entertainment.
We also note that the December 1987 Tax Reform Supplementary Information that expanded on the introduction of section 67.1 in the The White Paper: Tax Reform 1987, did not discuss the concerns identified in the 1963 Budget Speech. Instead it stated, in part:
The present law effectively allows a deduction for some part of expenses that are personal in nature since business meals and entertainment necessarily involve an element of personal consumption.
The White Paper proposed to limit the deduction for these expenses to 80% of their cost. The 80% limitation would apply to all business meals, including food and beverages, as well as to the cost of meals while travelling or attending a seminar, conference, convention or similar function.
Therefore, we are of the view that our interpretation is also consistent with the purpose of the provision.
The Taxpayer also noted that subsection 67.1(2) contains a number of exceptions to the application of subsection 67.1(1) as evidence that the Government does not intend for the provision to apply to all meals and entertainment, "rather they are focused on 'expense account living' approaches whereby a select few employees entertain lavishly under the guise of a business expense." We disagree. In our view, the fact that the Taxpayer has not argued that any of the exceptions apply to the expenses in question (nor do we see any that are applicable) further indicates that section 67.1 applies to the expenses in question.
Finally, we are of the view that the above-mentioned Canadian Tax Journal article further supports our view that section 67.1 of the Act applies to the expenses in question. In the article, the author does not argue that section 67.1 does not apply to all meals and entertainment, but that the law should be changed so that it only applies to expenses that are "lavish or extravagant." In particular, we note the following:
In summary, the 80 percent [now 50 percent] limitation on the deduction of entertainment expenses should be repealed and replaced by rules that prohibit any deduction for specific entertainment expenses, including the cost of the taxpayer's own entertainment, the cost of luxury items, and the cost of entertainment not conducive to business. Further, deductible expenses should be deductible only to the extent that they are not lavish or extravagant.2
The role of the CRA is to administer and enforce the Act as enacted by Parliament. The Department of Finance is responsible for tax policy. Therefore, recommendations for changes to the Act should be directed to that department.
Olympia Floor & Wall Tile [70 DTC 6085]
The Taxpayer is of the view that even though an expense may fall under one provision of the Act, it does not render the expenses inadmissible for a different purpose under another provision of the Act. Therefore, because the deduction for the expenses is taken under section 9 of the Act and is not denied by virtue of paragraph 18(1)(a) of the Act, they are not expenses that are subject to section 67.1 of the Act.
We disagree. Subsection 9(1) of the Act states:
Subject to this Part, a taxpayer's income for a taxation year from a business or property is the taxpayer's profit from that business or property for the year (our emphasis)
In other words, subsection 9(1) is only the starting point for the calculation of a taxpayer's income for the year and is subject to the other provisions contained in Part I of the Act (which includes section 67.1). As the Taxpayer notes, paragraph 18(1)(a) of the Act denies a deduction for expenses that were not incurred for the purpose of gaining or producing income. On the other hand, subsection 67.1(1) applies "For the purposes of this Act." This provides the ordering by which the provisions must be applied. Section 67.1 applies after the application of section 9. As a result, to the extent that section 67.1 applies to a given expense, the expense is limited to 50% of the lesser of the actual expense and a reasonable amount in the circumstances.
We agree with the position put forth by the Tax Services Office. Subsection 67.1(1) of the Act applies to the food, beverage and entertainment expenses incurred in connection with the Taxpayer's XXXXXXXXXX Meetings and Conventions.
We trust our comments are of assistance.
John Oulton, CA
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
1. Claire F. L. Young, "Deductibility of Entertainment and Home Office Expenses: New Restrictions to Deal with Old Problems" (1989) vol. 37, no. 2 Canadian Tax Journal 227-266.
2. Ibid. Page 265.
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