IS YOUR COMPANY UP-TO-DATE ON THE GST AND INCOME TAX RULES FOR PERSONAL USE AUTOS AND MEALS & ENTERTAINMENT?

Personal Use Automobiles

Income Tax Reporting

A taxable benefit arises on any vehicle owned or leased by a corporation that is also used personally at any time by an employee or shareholder (referred to as a standby charge). An operating cost benefit equal to 24 cents per personal kilometer (2009 - 24 cents per kilometre) driven must be included in an employee or shareholders income to the extent that the corporation pays any of the operating costs of the vehicle. The corporation is restricted to a maximum deduction in respect of capital cost allowance, lease expense and interest costs on passenger vehicles. Generally, the restriction applies to a vehicle costing in excess of $30,000 before PST and GST, or a lease with a monthly cost in excess of $800 before PST & GST, or interest in excess of $300 per month. (All figures were the same for the 2009 taxation year). The Canada Revenue Agency ("CRA") requires the employee/employer to maintain records to support the business kilometers traveled during a year. Where the employee owns the automobile, an employer may pay a reasonable tax-free car allowance based on the business kilometers traveled. The CRA will permit deductions of car allowances paid by corporations up to $0.52/km for the first 5,000 kilometers, and $0.46/km for any additional kilometers. All figures were the same for the 2009 tax year.

GST Impact

1. GST is payable by the corporation on the standby charge benefit determined above at the rate of 5/105 of the benefit, and the operating cost benefit at the rate of 5% of the taxable benefit. The GST must be included in the return for the period which includes February of that year (the time T4s must be submitted). The taxable benefit for the standby charge reported on the employee's T4 must include GST.
2. When claiming input tax credits for GST in respect of such vehicles, the input tax credit is limited to the amount eligible for deduction for income tax purposes. The excess does not qualify for an input tax credit.
3. An employer that pays a car allowance to an employee is entitled to an input tax credit of 5/105 of the car allowance paid. Note that where a GST input tax credit is claimed on the allowance, the allowance deducted for tax purposes should be reduced by the GST credit claimed.
4. In an unincorporated business, the GST input tax credit is only claimed on the purchase price if the vehicle is used at least 90% for business. In any other case, the GST input tax credit is claimed based on the eligible capital cost allowance claimed in the year.
   

Meals & Entertainment Expenses

Income Tax Reporting

Generally, the tax deduction in respect of business expenses incurred for meals and entertainment is restricted to 50% of the expenses incurred.
For this purposes, meals & entertainment include, but are not limited to, such items as:

• meals with customers or other business contacts where business is conducted.
• meal allowances paid to employees.
• restaurant gift certificates.
• cost of tickets for a theatre, concert, athletic event or other performance.
• the cost of private boxes at sports facilities.
• the cost of a cruise.
• the cost of admission to a fashion show.
• cost of entertaining guests at night clubs, athletic, social and sporting clubs and on vacation and other similar trips.
• security escort or tour guide

The meal/entertainment cost at a conference, convention, seminar or similar event where meals/entertainment are provided (other than incidental amounts, i.e. coffee, muffins) where the cost of such meals/entertainment is part of the fee paid for attendance is deemed to be $50 per day.

An exception to the 50% restriction is made in the following circumstances, in which 100% of the expense is deductible for tax:

• where the sale of the same food, beverages or entertainment is part of the company's ordinary business.
• if the expense is for a fund-raising event, the primary purpose of which is to benefit a charity (other than the price of admission to an event that is part of the regular activities of the charity i.e. theatre tickets for an amateur theatre group charity).
• when the company is reimbursed for the expense and the reimbursement is included in income.
• meal expenses paid for employees at remote work sites, where the employee's regular residence could not be used, and the period at the work site is not less than 36 hours.
• expenses included in the employee's income.
• if the meals and/or entertainment provided by the employer is generally available to all employees at a particular place of business (i.e. Christmas parties, employer-operated restaurants or cafeterias with access available to all employees - watch employee benefit on subsidised meals). This exception also applies to meals and entertainment which includes the spouses and children of employees, if the invite is offered to all employees.
• meals included in the price of a train, plane or bus fare.

Items that are never deductible for tax purposes:

1. meals consumed during the ordinary business day when no business meeting is conducted.
2. membership fees or dues in any club, the main purpose of which is to provide dining, recreation or sporting facilities for its members (i.e. golf club membership).
3. expenses related to the use or maintenance of a yacht, camp, lodge or golf course or facility, unless the company is in the business of renting out such property. (i.e. golf fees).

The CRA has stated that business meals enjoyed at a golf course, when golf is also played, are subject to the 50% restriction (previously had been subject to 100% disallowance) so long as meal and beverage expenses are clearly itemized.
Note that all meals and entertainment expenses must be reasonable and incurred for the purpose of earning business/employment income. To support the business nature of these expenses, the CRA recommends that records be maintained that provide the following:

• names and business addresses of the customers or persons being entertained.
• relevant places, dates, times and amounts supported by vouchers.

GST Impact:

• Only 50% of meals and entertainment qualify for an input tax credit.
• For disallowed tax expenses, i.e. golf dues, an input tax credit is not available.
• If the company pays a meal allowance, the company can claim 5/105 for a GST input tax credit, subject to the 50% limitation.
• The CRA generally allows a company to take 5/105 as an input tax credit for meals and entertainment where the company has not specifically tracked the GST. The reduced rate accounts for tips, PST, etc.

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It is our experience that when the CRA conducts an audit, these items are carefully reviewed. Significant interest and penalties may result from non-compliance.

"Information contained herein is of a general nature. No action should be taken without seeking professional advice that takes into account current developments and the specific facts of a particular situation."

[Updated -February 20, 2010]