Meals and entertainment limitation (s. 67.1)

It matters when a buyer reviews the expense deductions in a target’s tax returns, as in the answer on which tax filings to review. Under section 67.1(1), subject to subsection (1.1) and to the exceptions in subsection (2), an amount paid or payable for the human consumption of food or beverages or the enjoyment of entertainment is deemed to be a fixed share of the lesser of the amount actually paid or payable and an amount that would be reasonable in the circumstances. Section 67.1(1.1) has a separate rule for long-haul truck drivers.

Exceptions

Section 67.1(2) lists cases where the limit does not apply. Among them are food, beverages or entertainment provided for, or in expectation of, compensation in the ordinary course of a business carried on by that person of providing them for compensation, a fund-raising event whose primary purpose is to benefit a registered charity, and an amount for which the person is compensated where the compensation is reasonable and specifically identified in writing to the person paying it. The CRA’s guide for self-employed business income gives examples of the same kind, such as a restaurant, hotel or motel, or a meal billed to a customer and shown on the bill.

What to ask

• How the target applied the limit to its meals and entertainment expense
• Whether it relied on an exception, and what records support that
• Whether the amount in the return matches the general ledger