If you’re looking to boost employee morale and give your employees a bonus in a tax-efficient way, you should consider a simple solution: throwing a party. The tax rules for employer-sponsored events are quite favorable for both the employer and employees, but the Income Tax Act and the Canada Revenue Agency impose certain limits.
The Rules Concerning Meal and Entertainment Expenses
The Income Tax Act imposes important limitations on the deduction of meal and entertainment expenses. As a rule, only 50% of the expenses are deductible, and the other 50% are considered to be personal and therefore not incurred to earn income. Club memberships are not deductible at all.
Meals and entertainment include restaurants and a wide array of other items and activities, such as tickets for a theatre performance, a concert, an athletic event, or another performance as well as the cost of entertaining guests at night clubs, athletic clubs, or social and sporting clubs.
The only way to deduct these amounts is if you include them in your employees’ income as a taxable benefit. Obviously, most employees would not appreciate this, and it would certainly not help to boost morale and employee happiness at your company.
Special Rules for Employer-Sponsored Events
There is, however, an exception to these rules that you can take advantage of up to six times a year. Tax laws allow for the full deduction of the expenses that are related to up to six employer-sponsored events per year. In this context, “employer-sponsored events” is basically a euphemism for “office party.”
The 50% limit doesn’t apply if you incur expenses for food, beverages, or entertainment that meet certain criteria. They must be generally available to all of your employees at a particular place of business and be consumed or enjoyed by them. A classic example is an annual Christmas party to which all employees are invited.
The CRA has indicated that a “particular place of business” doesn’t necessarily mean that you have to invite everyone from every department in your business. The CRA’s definition can include a cluster of buildings, a building, or a portion of a building, depending upon the circumstances. For example, if you have office space in one place and a warehousing operation elsewhere, you could have two distinct functions for your two places of business. This does not mean that the party must be held at your place of business. It may be held at a restaurant, a rented hall, or any other appropriate location.
As an added benefit, the exception for employer-sponsored events also applies to the costs of food, beverages, and entertainment for your employees’ spouses and children. The parties do not represent a taxable benefit for the employees.
The employer must pay for and organize the event. If the employer reimburses an employee social club for expenses, the 50% deduction limit applies.