21 November 1996 External T.I. 9628295 - ENTERTAINMENT EXP FOR COMMISSION SALESPERSONS

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 Department.

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

Principal Issues:

why is only 50% of entertainment expenses deductible for commission salespersons? comments wanted on the meaning of "reasonable in the circumstances"

Position:

limitation reflects element of personal consumption in these amounts (originally introduced when the tax base was being broadened to permit lower tax rates). Reasonableness is determined on a case by case basis. Ordinary tests applied (at individual expense level and total expenses level) such as amount sought to be deducted, the purposes of the expenditure, the nature of the expenditure, the similarity to and amount of other such expenses claimed, expenses of other employees or officers employed in a similar capacity and so on.

Reasons:

									962829
XXXXXXXXXX							Sandra Short

November 21, 1996

Dear XXXXXXXXXX:

Re: Entertainment Expenses for Commission Salespersons

This is in reply to your letter sent to the Winnipeg Taxation Centre, dated May 24, 1996, and forwarded to us for reply. We apologize for the delay in responding to you and hope that this has not caused you any undue inconvenience.

You have asked why only 50% of entertainment expenses are deductible against commission earnings and also for guidance on how you may determine whether an amount is "reasonable in the circumstances," as referred to on page 6 of the 1994 Employment Expenses guide.

Our Comments:

The limitation on the deduction of business meals and entertainment expenses was introduced in order to disallow the personal element which exists in these areas of consumption. Tax Reform documents from 1987 state that as a part of the broadening of the tax base in order to permit lower tax rates, the deduction for business meals (including food and beverages) and entertainment expenses (such as accommodation at a resort and tickets for the theatre, concert, athletic event or other performance) was to be limited. Background information provided by the Department of Finance at that time states:

Business meals and entertainment involve an element of personal consumption and therefore some part of their cost can properly be characterized as a personal expense that should not be deductible. While it is difficult to ascertain what portion of the cost of meals and entertainment represents personal consumption, it is clear that a full deduction for such expenses simply because they are undertaken in the course of business allows the write-off of some part of expenses that are of a personal nature. Many countries have limited the deductibility of meals and entertainment expenses. For example, similar restrictions currently apply in the United Kingdom, Australia and the United States...

If the amount expended for meals or entertainment is beyond that which is reasonable in the circumstances, the deduction may be reduced from 50% of the amount actually spent to some other amount. Ordinary tests for establishing the "reasonableness" of an expense will be applied. Reasonableness may be examined at both the individual expense level and from a total expenses perspective. In determining whether an individual expense is reasonable "in the circumstances," the Department looks to the amount sought to be deducted, the purposes of the expenditure, the nature of the expenditure, the similarity to and amount of other such expenses claimed, expenses of other employees or officers employed in a similar capacity, and so on. There are no dollar limitations or standards to determine reasonableness. Clearly what is reasonable in any situation can only be ascertained on a case by case basis.

We have attached a copy of Interpretation Bulletin IT-518R "Food, Beverages and Entertainment Expenses" which may help with other questions you may have.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
Section Chief
Business, Property & Personal Section
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Encl.