How to claim meal and entertainment expenses when it falls under the 50% rule?

That depends on who is asking. Is this personal, or corporate? (could also be partnership, trust/estate)

Is this a personal tax query? If so, you can record the full amount as meals and the HST as HST ITC, then at year end make an adjustment to record half of the amount as meals expense on the T2125, and remove half of the ITC claims for meals that are at 50% (some meals might be at 100% because you've been reimbursed for example).

There is a special dispensation to allow you to make this adjustment once a year, it's found in the GST General Guide. 

The half that isn't claimable, and the half of the ITC gets recorded to the proprietor's draws account at year end so you can reconcile your income statement against your T2125.

If this is a corporate tax query, you would also record the full amount as meals expense, and the same with the HST, adjust at year end. When you adjust at year end, reduce the ITC claim and record that 50% amount as non deductible expense. When you record your income on the top of the T2S1, you include 100% of the meals and the 50% of the HST and add back 50% of meals and 100% of the 50% of the GST/HST on the form to increase your income for tax purposes, but you don't do anything with it for accounting purposes. No need to charge the shareholder loan account for that amount. 

The T2S1 has many lines on it for many adjustments from income per the P&L to income for tax purposes. It's very different from the T2125 for personal purposes which requires you to complete each line, and requires 100% of meals to be recorded and then reduced by 50% to arrive at taxable income.

Hope that helps. Take a look at the tax forms, just google T2125 and T2S1 to see the required reporting. And yes, you do report each line for tax on the T2, on the S125 using GIFI codes. 

I have almost the same question, but it also relates to the Sales Tax report and the HST filing with the CRA.  Tax software adjusts the meals & entertainment expense by 50% for both the T2 and the T2125.  So you enter $100 as M&E and the software reduces it to $50 for either of corporate or personal tax purposes.   The problem for me is how to keep the QB sales tax filing in sync with the CRA sales tax filing.  I think the best way is to set up a sales tax code of 6.5% and apply it only to the Meals & Entertainment account in the chart of accounts.  The issue then becomes the liability account and how to offset the unbalanced 50% of the HST.  Example:

DR M&E $100 (base cost)

DR HST Payable $6.50 (ITC)

CR Bank $113 (assume you pay cash)

DR Owner's Draw $6.50 (this is the manual part that you have to do)

The other option is to leave the HST at 13% but manually override it - replace $13 with $6.50, and as before manually add the debit to Owner's Equity.  It's more difficult when you have a client who has recorded full ITCs on meals and you have to file for them; QB doesn't like it when you manually debit the HST liability account with a journal entry.  

You could also take an extract of the M&E expenses and adjust out half the ITCs when filing, but then your CRA filing wouldn't match your QB filing.  Not a big deal to some.

I would love to hear some other thoughts on this problem.  I really thought I was missing something until I saw your question.

Why are you recording an owners draw? 

The 50% of the ITC is a non deductible expense along with the 50% of the meal. I usually set up a sub account for the non deductible 50% and at year end when adjusting out the 50% ITC post that to the same account. There’s no need to charge the owner or shareholder. Simply record the amount to add back on the T2125 or the T2 S1

Fair enough.   But do we agree that this part of the entry has to be done manually, whether it be when the expenses are entered or as a year-end adjustment?

I agree, it's a manual entry, this isn't something you would automate.

First of all for a corporation it’s shareholders not owners. 

Second a corporation adds back the other 50% as a non deductible expense. It isn’t a draw at all. 

what about the tip??

Where on the T2 S1 would you enter the non-deductible GST amount? I'm not sure what category this would be. Would it be Line 347 "Non-taxable/deductible other comprehensive income items"?