Recently a woman called me at noon from the airport in Nanaimo. She had flown over for the morning. Her question was a simple one. “If I buy a cup of coffee and a sandwich at the airport in Nanaimo, can I write it off? I flew over from Vancouver to deal with a staffing emergency at a retail outlet, one of about 10 outlets I own in and around the Lower Mainland and on Vancouver Island. Someone called in sick. I hopped a 20-minute commuter flight to open the store and stayed until alternative
Her question seemed like a no-brainer. You flew across a large body of water quite a distance from home, you are working for your company, so it is a business expense. Or is it?
I remembered that there might be a twist. Every time you are asked a tax question, you must review the law, and then compare the facts with the law to see if it fits. Sound easy? Why is it that so many tax disputes about claiming expenses end up in the highest courts in our land? Could it be that the rules are not so simple to interpret?
I recalled that there are different rules for different people depending on who they are, who they work for, and what their contract for employment states. Section 8(1)(h) of the IncomeTax Act stipulates that railway, commission sales, transport, or employees ordinarily required to carry on duties away from the employer’s place of business and required under contract of employment to pay travel expenses incurred except where an allowance is received are dealt with separately for each type of employment or office.
In this case, this woman didn’t have an employment contract that stated she was required to work in different places. I recommended she see a lawyer to draw up an employment agreement if she met the criteria in s. 8(1)(h).
I remembered a similar situation where the employees lived and worked in Whistler. Their company imported products for re-sale from Mexico. It was less expensive to pick up the product in Point Roberts than to pay broker fees and shipping. Me, I would pay almost anything not to drive that Whistler road — ever — let alone on a regular basis. They would make the return trip the same day or the next day depending on how long it took at the border and the time of day. The trip from Whistler to Point Roberts is about 160 clicks, or 320 round trip.
Was it unrealistic to expect a one-day round trip? Factor in long delays for road construction, slides, washed out bridges, icy roads, weather, traffic, night driving, and customs delays at Point Roberts border crossing. The return trip involved frequent stops over 6 to 10 hours of driving, usually accomplished over two days, but fairly frequently in one day, stopping at Starbucks in Squamish, North Van, Delta, and at least one stop for a MacDonald’s meal as well as a restaurant meal along the way to fortify the employee during this journey.
Now if the employee was under contract and ordinarily carried on duties away from the employer’s place of business or in different places, s. 8(1)(h) rules would apply rather than those in s. 8(4).
Everyone not under contract falls under the general rule in Section 8(4) of the Act.
This rule states, “An amount expended in respect of a meal consumed by a taxpayer who is an officer or employee shall not be included in computing the amount of the deduction … unless the meal was consumed during a period while the taxpayer was required by the taxpayer’s duties to be away, for a period of not less than 12 hours, from the municipality where the employer’s establishment to which the taxpayer ordinarily reported for work was located and away from the metropolitan area, if there is one, where it was located.”
It sounds straightforward at first glance. But it’s not.
First, you would need to know if an employee fits into one of the special categories or has a contract that states he or she is required to carry on duties in different places. Absent a contract of employment, he or she falls under this 12-hour rule.
How do I figure out what a metropolitan area is? After a significant search through Can-Rev’s labyrinthine Website, I find Nanaimo is in an Urban Area. So is Delta. I assume that they are not in the same metropolitan area, though this map refers to Urban Area, not metropolitan area. Whistler is 48 km outside the nearest 30 km Urban Area Zone.
Hmmm, what were those rules about urban/rural special work locations? The special work location must be at least 30 km from the closest urban centre that has a population of 40,000 or more people. Whistler has an average of 28,000 people in situ when I check.
The taxpayer is moving from a rural to an urban area and back to rural. The rules do not discuss what happens when the taxpayer goes from rural to urban, only from urban to a remote site. Can I make a leap to say that the special remote worksite rules apply when away from Whistler at the Coast? In reality, at 48 clicks from the edge of a major urban area, is Whistler really a remote site?
Our interpretation of the Income Tax Act is supposed to be textual, contextual, and purposive. We have to look at the words in the Act, the context in which they are written, and the reason the rules were written in the first place. We are expected to use common sense and reasonability when we claim expenses, factoring in specific parameters such as employment contracts and minimum hours away. We are supposed to know what it means to “ordinarily report for work” and what the
definition of a “metropolitan area” is.
Exactly where does the taxpayer ordinarily report for work? Which metropolitan area is that work located in? Are they away for over 12 hours because they choose to stay away to visit friends or family or because it is a hardship to drive a difficult, perilous road? We have to refer to Interpretation Bulletins, court cases, and then hope that an auditor who may not understand what it takes to do business in our industry doesn’t decide to take a dim view of a claim for a cup of coffee because you weren’t away from the office and your metropolitan area for over 12 hours or you have not bothered to have an employment contract with your company drawn up.
What’s in a meal?
Are coffee and a snack a meal, or is a gift basket with food in it a meal? How literal does one have to be? Is coffee a meal? How do you compare the price of a fancy coffee concoction at Starbucks or Seattle’s Best with a plain coffee at Tim Hortons? When these laws were written, coffee wasn’t a gourmet experience in exclusive high-end dispensaries. Today, coffee purchases on an annual basis can equate to a decent size RRSP contribution.
We find an exception for coffee in CanRev’s InterpretationAbout Conventions that a meal is not considered to include coffee or donuts for the $50 allocation of price to meals. Does that apply to other circumstances? A cup of fancy coffee may run well in excess of $5.
Consider the gift basket with food and beverages in it, with, say, a coffee selection, a mug, and some gourmet cookies. Sales people often give gift baskets valued from $50 to as much as $200 or more as appreciation for the sale. They don’t personally consume the food or beverages, but is a gift basket considered food or entertainment even if you don’t partake?
The answer as to whether a coffee is considered separately is clearly laid out in the wording of s. 67.1(1): “Expenses for food, etc. (or entertainment). For the purposes of this Act other than s. 62, 63, 118.01 and 118.2, an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is deemed to be 50% of the lesser of … the amount actually paid or an amount in respect thereof that would be reasonable in the circumstances.”
Note that long-haul truckers recently received a reprieve from the 50% rule in the spring 2007 budget. There is a phased-in specified percentage of 60% in 2007, and up to 80% after 2010, but they must be away for 24 hours and beyond 160 kilometers. Interesting that it’s beyond my Whistler range. I wonder why they picked that number? The 50% limitation is supposed to reflect personal consumption inherent in meals and entertainment where it is allowed to be deducted.
Let’s do lunch!
The moral of the story is that there is strength in numbers. Never eat or drink alone if you want to write it off unless you are one of the exceptions.
Most businesses supply coffee, tea, creamers, bottled water, juice, pop, snacks, and even alcohol in the office fridge. You must have, or supply an auditor with, the business reason and names of who participated and the reason for consumption. Strength in numbers: Take your office breaks together. Can you call it team building, and write it off? Would an auditor observe that behavior in your office?
A business is allowed to write off six office events a year and claim a 100% deduction on those events. Custom in many offices is for the department head to take everyone in the department out for lunch for each employee’s birthday and also for Christmas. This is in addition to the annual Christmas event. The business reason might be “employee team-building,” for example, if this applies. Strength in numbers: Lunch together and write it off.
You may entertain yourself and your clients or employees by attending events that most people in Canada could not afford, including theatre, concerts, and athletic events. Given most Canadians earn less than $30,000 a year, they cannot afford private boxes at a sports facility, or the cost of a cruise or a fashion show, or night club tickets. Ever wonder how much business is transacted in private boxes at a rock concert or a at hockey game or on a cruise? Why is it that golf and fishing are not considered eligible entertainment? Why is the cost of cruising allowed, while fishing is not? Both require water and a boat.
I read recently how Oprah Winfrey was entertained on Jimmy Pattison’s yacht in the Alaska panhandle. Now I don’t know if this was personal or business. Will a line of Oprah baby clothing be coming to Super Stores near us this fall as a result? Strength in numbers again: The wealthy play together and write it off.
For any outlay for entertainment to qualify as a business expense, you must be able to demonstrate that the amount was incurred for the purpose of earning income. Records of the business reason as well as names and business addresses of customers or persons being entertained and relevant places, times, dates and amounts supported by vouchers must be kept.
What happened to customer service? Is customer loyalty still bought with box seats and copious amounts of alcohol, or as the media would have us believe, has the younger corporate crowd switched to “greener” activities, white water rafting, outdoor adventure tours, and so forth? Strength in numbers: Do it together and write it off. Again, where does reasonability factor in? Who decides what is reasonable? To the guy making $30,000, is any of this reasonable?
Rule of thumb
Travel and eat and drink solo at your own peril. If you do, keep a log of how long you were away, why you were away, and how come you couldn’t get back within 12 hours. Negotiate for a contract that you do not work in the office and are required to carry on duties away from your employer’s place of business or in different places, and be prepared to provide documentary evidence.
Arrange your meals together with an employee, team member, colleague, client, customer, supplier, or partner to discuss business matters. Unless you meet the criteria of railway, commission sales, transport, or have a contract to carry on duties away from the place of business or in different places, remember the 12-hours-away rule.
Of course, reasonability is always a concern. What would a reasonably prudent person do in the same circumstances? Is it time to review the inclusions for cruises, private boxes, and hospitality suites?
If you feel this article did not answer all of your questions, you are not wrong. Compare the tax law about meals to any fact pattern and see if you can figure out how to interpret the law. Canada’s tax courts are busier than ever for a reason.
References for further reading
T4002 Business and Professional Income
S. 8(1) Deductions allowed
S. 8(4) Meals
S. 67.1 50% rule and exclusions
IT 148 Recreational Properties and Club Dues
IT 352 Employee’s Expenses, Including Work Space in Home Expenses
IT 487 General Limitations on Deductions of Outlays or Expenses
IT 518 Food, Beverages and Entertainment Expenses
IT 522 Vehicle, travel and sales expenses of employees provides further clarification.