Entertainment expense
Spending on meals, events or hospitality for clients, prospects or staff, which tax rules often restrict more tightly than other business costs.
In short
- In Canada, only 50% of most meal and entertainment costs is deductible, and the input tax credit is limited in the same way.
- Some costs are fully deductible, such as up to six events a year open to all employees at a location.
- The receipt needs attendees and a business purpose, not just an amount.
An entertainment expense is money spent hosting or treating people for business reasons: taking a client to dinner, buying tickets to a game for prospects, hosting a holiday party or catering a team event. Because these costs have a personal element, tax authorities limit how much of them can be deducted.
The Canadian 50% rule
For income tax, the CRA generally allows only 50% of the cost of food, beverages and entertainment to be deducted. The same limit applies to recovering the GST/HST paid: only half of the tax is eligible as an input tax credit, usually adjusted at year end. There are exceptions, including up to six special events a year to which all employees at a particular location are invited, and meals billed to a client and shown on the invoice.
Elsewhere
In the United States, entertainment has not been deductible since 2018, while most business meals remain 50% deductible. Other countries have their own limits, so a multinational expense policy often has to code these costs by country.
What to record
Beyond the receipt, entertainment expenses need the names of attendees, their business relationship and the purpose. That detail is what supports the deduction if the claim is reviewed.
Worked example
A client hockey night in Ontario
A firm spends $800 plus $104 HST on hockey tickets for two clients and two staff. For income tax, $400 is deductible. For HST, the firm can recover $52 as an input tax credit, not the full $104. The claim records the client names, their company and the account discussed.