Meals and entertainment expenses in Canada: the 50% rule

Yes, you can deduct business meals in Canada — but usually only half of them. The CRA caps the deduction for food, drinks and entertainment at 50%, and the same 50% applies to the GST/HST you claim back. Most of the mistakes people make with meals come from applying one half and forgetting the other.

The 50% rule

The CRA says the most you can claim for food, beverages and entertainment is 50% of the lesser of what you actually spent and an amount that is reasonable in the circumstances (CRA, line 8523).

Two things follow from that wording:

• It has to be a business expense first. Lunch with a client to talk about a job qualifies. Your own lunch on an ordinary workday at your usual place of business is a personal expense, and 50% of a personal expense is still zero.
• "Reasonable" is a ceiling. A $900 bottle of wine at a client dinner is not made deductible by the client being there.

The limit also applies to your own meals when you travel for business or go to a conference, convention or similar event (same CRA page).

What counts as entertainment

The CRA lists tickets and entrance fees to entertainment or sporting events, gratuities, cover charges, and room rentals such as hospitality suites (CRA, line 8523). Note that tips are inside the 50% limit — they are part of the meal, not a separate full deduction.

The GST/HST half: claim 50% of the tax back

If you are registered for GST/HST, you normally claim back the tax you pay on business purchases as input tax credits (ITCs). On meals and entertainment, most businesses can only claim 50% of that tax (CRA, ITC eligibility percentage). Charities and public institutions can claim 100%, and long-haul truck drivers 80%.

The CRA gives you two ways to get there (CRA, methods to calculate ITCs):

1. Claim 50% as you go. Claim half the GST/HST on each meal in the period you pay it. Nothing to fix at year end.
2. Claim 100% during the year, then pay half back. Monthly and quarterly filers add the 50% adjustment to the first return of the following fiscal year; annual filers add it on that year's return.

Method 1 is simpler and is the one most bookkeepers use, because the books are right every period rather than wrong until the adjustment.

Worked example

A client lunch in Ontario: $100 of food plus $13 of HST (13%, per the CRA's rates page), paid on the business card. Total $113.

• ITC claimed: 50% × $13 = $6.50
• Cost on the books: the CRA says the expense you deduct includes the GST/HST you paid, minus any ITC you claimed (CRA, expenses section of T2125). So $113 − $6.50 = $106.50
• Deductible for income tax: 50% × $106.50 = $53.25

Book it as $106.50 to a meals and entertainment account and $6.50 to GST/HST receivable. Your accountant (or the tax software) applies the 50% income-tax limit to the account total at year end. The mistake to avoid is claiming the full $13 as an ITC and deducting half of the $113 — that takes the tax twice.

If you are not registered for GST/HST, there is no ITC: the whole $113 is the cost, and $56.50 is deductible.

The exceptions: when it is not 50%

The CRA lists six situations where the 50% limit does not apply (CRA, line 8523):

• You sell food or entertainment. A restaurant, hotel or motel that regularly provides food, drinks or entertainment to customers for payment.
• You bill the client for it and show the cost on the bill. The meal is then a cost you recover, not entertainment you absorb.
• Remote or special work locations, where the meals are (or would be) included in an employee's income — with conditions, including that the location is at least 30 km from the nearest urban centre with a population of 40,000 or more.
• Staff parties, where you invite all employees from a particular location. This is limited to six such events a year.
• Charity fundraisers, where the event was mainly for the benefit of a registered charity.
• Temporary work camps built to provide meals and accommodation to employees working at a construction site.

Long-haul truck drivers get their own rule: 80% for food and drinks consumed during eligible trips (same page).

The staff-party exception is the one small businesses use most. A holiday dinner for the whole team is fully deductible; taking two favourite employees out for drinks is a 50% meal.

Meals that are not deductible at all

• Your own everyday lunches. Eating is personal unless you are travelling or entertaining for business.
• Meals with friends or family where business is an excuse rather than the purpose.
• The part of any bill that is more than reasonable in the circumstances. The 50% applies to the lesser amount.

When personal meals land on the business card — and they will — they are not an expense at any percentage. They belong in the shareholder loan or owner's draw, not in meals and entertainment.

Keep the receipt, and write on it

The CRA can ask you to show a meal was for business. A card statement shows you spent $113 at a restaurant; it does not show who was there or why. Keep the itemized receipt and note:

• Who you were with (name and company)
• What business it was for
• Whether it was a staff event for everyone at a location

Thirty seconds at the table saves an argument later. For how long to keep it all, see how long to keep business records.

Set up your books so the split happens automatically

The easiest way to get meals right is to give them their own account in your chart of accounts — never lump them into "office" or "travel" — and to book the GST/HST at half as each one comes in.

Spark Books does this by default: when a transaction is sorted to meals and entertainment, it claims half the GST/HST and books the rest to the expense, so your GST/HST return figures are already right. If it can't tell whether a restaurant charge was a client lunch or a personal one, it asks, and remembers your answer for next time.

The short version

• Business meals and entertainment: deduct 50% of the reasonable cost.
• GST/HST on them: claim 50% as an ITC.
• The expense on your books is the total minus the ITC; the 50% income-tax limit applies to that.
• Six exceptions, of which staff parties (up to six a year) and billed-back meals are the common ones.
• Your own lunch at your desk is personal.

If you want the books to apply the half-and-half rule for you, Spark Books is free — upload your bank and card statements and it sorts them into a Canadian chart of accounts with the GST/HST already split. No card needed.