As a Realtor, you may wonder if you can claim tax deductions on gift cards? If yes, then how?
Generally speaking, any expenses you incur for the purpose of earning income are tax deductible. Subject to certain limitations as specified by the Income Tax Act, ofcourse.
Limitations, such as subsection 67.1(1) of the Income Tax Act, that reduces the meals and entertainment expenses to 50% tax deduction instead of 100%, in respect of human consumptions of food or beverages or the enjoyment of entertainment.
This simply means that if you take your clients out for dinner, only half of the meals are deductible. You can spend $50 for both of you, but only $25 is deductible. This is stated in the Income Tax Act to eliminate the personal enjoyment portion of your meals.
You may also wonder, if you can deduct 100% of your meals expenses if you purchase restaurant gift cards entirely for the enjoyment of your clients without any of your participation?
Example: Real Estate Agent claims Tax Deductions
A self employed real estate agent, as a taxpayer in 2006 had already brought this scenario to court (The Queen v. Stapley, 2006 DTC 6075). The taxpayer often bought gift certificates for food and beverages and tickets of various sporting events to his clients. He did not attend the dinners and the sporting events and hence he deducted 100% of the costs.
Initially the Tax Court ruled in favour of the taxpayer, based on the fact that the purpose of subsection 67.1(1) was to eliminate the personal enjoyment component from the deductions and the taxpayer did not participate in any of these events.
Unfortunately, the Minister appealed the decision made by the Tax Court to the Federal Court of Appeal. Based on the literal translation of section 67.1(1), expenses for food, etc. are 50% tax deductible in respect of human consumption of food and beverages or the enjoyment of entertainment.
Just because the realtor did not get to enjoy the entertainment or the food and beverages, his clients did. And just because the objective of section 67.1(1) was meant to eliminate the personal enjoyment portion, the section was not written in such a way that it wouldn’t be applied if there was no personal enjoyment.
The judge reluctantly ruled in favour of the Minister. This means that all the gift certificates issued from a restaurant would be 50% deductible, not 100%.
Furthermore, in 2014, Judicial and CRA Interpretations of Canada Tax Law and Transactional Implication stated that if the gift certificates are issued by the supermarket, a permanent establishment that is primarily engaged in selling food and beverages, section 67.1(1) applies and only 50% of the expenses incurred are deductible.
Say, you are buying a Home Depot gift card, for the purpose of earning the property income. As Home Depot is not an establishment that is primarily engaged in selling food and beverages, you should be able to claim the expenses 100% as tax deductions.
On the other hand, if you purchase a Tim Hortons’ gift card (restaurant) or a No Frills’ gift card (grocery store), you may spend $100, but you only get to deduct $50. Only 50% is tax deductible.
So… when you are selecting your client gift card to your clients this year, you know which ones give you maximum deduction!
Last tip, when you purchase gift cards as clients’ gifts, make sure that you document the person whom you give the gift cards to and their contact information. In the unfortunate event of a CRA audit, you can be asked for the clients’ names and phone numbers.
You can find out more about my favourite gift cards in the following video:
Oh and if you want to know “How to claim tax deductions with gift cards as landlord”, click here.
Until next time, happy Canadian real estate investment!
Cherry Chan, CPA, CA
Canadian Real Estate Accountant