Whether you're hosting a holiday party for your employees this month or simply attending the company party, don't forget the taxman. Believe it or not, there are tax rules governing such parties. Hosts Planning to write off the cost of that Christmas party or year-end holiday lunch? The general rule in the Income Tax Act is that you can deduct the cost of food, beverages or entertainment if the expenses incurred are for the purpose of earning business income. The Act generally limits the deductibility of food, beverages and entertainment to 50% of the amount paid, referred to as "the 50% rule."
There are several exceptions to the 50% rule. The most important one is that the full amount of meals and beverages may be deducted by an employer if the food and beverages are generally available to all employees at a "place of business." There is a limit of six such events per calendar year.
What if you have multiple offices in multiple locations -- in Vancouver, Calgary, Toronto and Montreal, for example -- and it's impractical or too costly to bring all employees together for the annual party? No problem.
The CRA has conceded that where an employer has several places of business, each geographic location
will be considered a separate "place of business" of the employer and as a result, all the business locations would be entitled to have up to six separate special events per calendar year for which the 50% rule wouldn't apply.
What if clients also attend the annual holiday party? The CRA has indicated that as long as the special event is "generally available to all employees at a particular place of business," you don't have to limit the special event merely to employees and their families.
Also, the fact that there may be more clients than employees in attendance wouldn't prevent an employer from deducting the full cost of the employee portion.
Attendees Good news: A number of years ago the CRA clarified its position on the taxable benefit associated with holiday parties. The CRA stated it "accepts as a non-taxable privilege an employer-provided party or other social event, which is generally available to all employees, if the cost per employee is reasonable in the circumstances."
As a guideline, those events costing up to $100 per person will be considered non-taxable. Ancillary costs such as transportation home would increase that amount.
The CRA cautioned, however, that any parties costing more than that per person are generally considered to be "beyond the privilege point" and could result in a taxable benefit.
Thus, many employers now ask their employees to contribute a nominal amount, say $25 per attendee, to help defray some of the costs and ensure no taxable benefit arises.