It is very common for small business owners to offer gifts to clients in order to develop relationships with them. I mean why not? It is a great way to do business, treating your client to a dinner or even a hockey game can help small business owners develop relationships with clients that can go beyond a business.
While it is generally understood that the deduction associated with taking a customer out for a meal or event is limited to 50% of the cost, the rules are less clear when it comes to gifts. Often small business owners deduct the full amount of the cost of the gift from their taxable income as the reasoning behind the expense is that the gift was used to generate business income. However, this is not always the case, depending on the nature of the gift.
The Income Tax Act (ITA) 67.1(1) restricts the amount that can be deducted for human consumption of food or beverages, or the enjoyment of expenses to 50% of the lesser of:
In the context of gifts, a notable case is Stapley v The Queen, 2006 FCA 36. In this case the taxpayer was a self-employed real estate agent. He gave his clients food vouchers for their own use. In reassessing the taxpayer, the Minister reduced by one-half under subsection 67.1(1) of the ITA. The Tax Court of Canada (TCC) allowed the taxpayer’s appeal on the ground that the vouchers were not purchased by the taxpayer to consume food or enjoy entertainment personally, but to generate business income. The Crown appealed to the Federal Court of Appeal (FCA).
The Crown’s appeal was allowed. The conclusion was that the expenditures made by the taxpayer for the food vouchers were “in respect of the human consumption of food or beverages or the enjoyment of entertainment”. Therefore, they were subject to the 50% deduction limitation in subsection 67.1(1) of the ITA.
In plain language, the court ruled that if you give a gift card for food or alcohol to a client or customer you are allowed to deduct only 50% of the cost. Similarly, you are only entitled to an HST input tax credit for 50% of the cost.
If you do want to give your client a gift, it might be best to consider giving them something that cannot be consumed or enjoyed as entertainment. For example, gifting flowers, cards, retail gift cards (unrelated to food or entertainment) and tangible items (i.e. pens, mugs, clothing) may qualify for a full deduction if they are reasonable.
There are some specific exceptions that allow for a 100% deduction and they are as follows:
Some items to keep in mind when claiming gifts to clients as a business expense: