There's no free lunch, judge says

National Post

2011-09-10


It's widely known in tax circles that only 50% of the cost of meals and entertainment, when incurred as a legitimate business expense, is tax-deductible. What's not as well-known, however, is the rationale for this rule.

A recent Tax Court decision deals with this rule and delves into the fascinating yet underappreciated world of statutory interpretation.

The tale begins with Pink Elephant Inc., a company that provides information-technology training in various cities. The public educational courses are provided at a hotel, and breakfast and lunch are served to course participants. The fees to attend a course range from $2,000 to about $10,000, which includes the cost of the meals.

In 2006 and 2007, the tax years before the court, Pink Elephant deducted $67,500 and $82,550, respectively, as "catering expenses" representing the full cost it incurred in providing the meals to the course participants.

The Canada Revenue Agency reassessed the company and applied the traditional 50% limitation to disallow half the catering expenses in each of these two years.

In deducting 100% of the food costs, Pink Elephant relied on an exception to the general rule that allows a full deduction for amounts paid for "food, beverages or entertainment provided for . compensation in the ordinary course of a business carried on by that person of providing the food, beverages or entertainment for compensation."

The issue of statutory interpretation was whether Pink Elephant was in the business of providing food and therefore could rely on this exception to the general rule.

Before analyzing the exception, however, the judge referred to a Federal Court of Appeal case that looked at the "mischief" that the 50% limitation rule was enacted to curtail, which was the temptation for a business person to "blend personal and business expenses and attempt to deduct them both as business expenses." As a result, the legislature enacted the 50% limitation as an arbitrary proxy between personal and business expenses.

The judge concluded the providing of meals for compensation as part of the ordinary course of business was "not the mischief identified" by the higher court, irrespective of whether providing those meals is a minor or significant part of that business.

The CRA then tried to argue that since the invoice and the receipt issued for a particular course only indicated the total cost to the participant for the course and didn't separately identify the amount that course participants paid for the meals that the meals were not provided for compensation.

The judge would have none of it, analogizing: "If a person acquires land and building for a single price, it does not mean that either the land or the building was acquired for no compensation."

As a result, Pink Elephant was indeed entitled to deduct 100% of the catering expenses it incurred.