13 December 2010 Internal T.I. 2010-0389131I7 - Paragraph 67.1(2)(c)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the meals provided by the taxpayer are subject to the general 50% limitation in subsection 67.1(1) of the Act or allowable at 100% because of the exception in paragraph 67.1(2)(c).

Position: In the fact situation provided, the exception in paragraph 67.1(2)(c) would not apply.

Reasons: The meal costs were not specifically identified in writing to the client paying the compensation.

Joe Joseph
Audit Division
Toronto West Tax Services Office					2010-038913
5800 Hurontario Street 							T. Posadovsky, CMA
Mississauga ON  L5A 4E9						

December 13, 2010

Dear Mr. Joseph:

Re: Paragraph 67.1(2)(c) of the Income Tax Act

We are writing in reply to your email dated December 1, 2010 in which you requested our comments on the potential application of paragraph 67.1(2)(c) of the Income Tax Act (the "Act") in a particular situation.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.

In your email, you described a situation with the following facts and/or assumptions:

• A corporation (the "Taxpayer") was contracted to provide XXXXXXXXXX services to its clients in the XXXXXXXXXX industry.
• The Taxpayer provided meals to a number of individuals who were enrolled in clinical research studies.
• Contractual arrangements allowed the Taxpayer to bill its clients for the clinical research services based on a mark-up of estimated costs, including the costs of participant meals.
• Meals were not specifically identified or itemized on invoices given to the client.
• The Taxpayer claimed the full cost of meals as an expense in the computation of its income under Part I of the Act.
• The Taxpayer maintains that because of the exception in paragraph 67.1(2)(c), the Canada Revenue Agency ("CRA") should allow a 100% deduction of the meal costs and cites Kelowna Flightcraft Air Charter Ltd. v. The Queen, 2003 DTC 611 ("Kelowna Flightcraft") as support for its position.

Question:

Your question is whether the exception to the application of subsection 67.1(1) contained in paragraph 67.1(1)(c) of the Act would apply in the context of the situation described above.

Your Comments:

You do not agree with the Taxpayer's position because paragraph 67.1(2)(c) of the Act clearly states that the amount of the compensation must be "specifically identified in writing to the person paying the compensation". While the contracts may allow for meals to be included as part of total costs billed, the invoices provided by the Taxpayer to its clients do not specifically identify the amount of meals being billed and it is not possible for the clients to determine the amount of the meals by referencing the contract and the invoices for the services. As it is impossible for the clients to add back the non-deductible portion of the meal costs under subsection 67.1(1), the exception in paragraph 67.1(2)(c) does not apply in the situation described and the Taxpayer's meal costs are subject to the 50% limitation in subsection 67.1(1) of the Act.

Our Comments:

Subsection 67.1(1) of the Act provides that an otherwise deductible amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is restricted to 50% of the lesser of the amount actually paid or payable and an amount that is reasonable in the circumstances.

There are several exceptions to the application of subsection 67.1(1) of the Act contained in subsection 67.1(2), including an exception in respect of amounts for which another person compensates the taxpayer. Under paragraph 67.1(2)(c) of the Act, the 50% limitation does not apply if the amount paid or payable by the taxpayer for the food, beverages or entertainment is an amount for which the taxpayer is compensated by another person and the amount of the compensation is reasonable and specifically identified in writing to the person who is paying the amount.

A similar situation to yours was considered in External Interpretation document 2006-0167861E5. A marketing and communications agency that provided promotional services to its clients incurred food and beverage expenses, such as purchases of wine and restaurant meals, as part of its promotional activities. Although such activities were specified in the contract with its clients, the actual charges were not specifically itemized on the invoices. We explained that the purpose of paragraph 67.1 (2)(c) is to allow taxpayers to deduct all expenses related to food, beverages or entertainment where the taxpayer has made it clear to the payer the amount relating to such expenditure is included in the billing, so that the latter is subject to the limit in paragraph 67.1(1) instead of the taxpayer. Thus, if the taxpayer is compensated for his expenses by a third person, the 50% rule applies to the person paying the compensation. As such, we concluded that the company did not meet the requirements of paragraph 67.1(2)(c). Further, it is the taxpayer's responsibility to determine the amount related to food, beverages or entertainment and communicate precisely such amounts if they want to invoke the exception provided in paragraph 67.1(2)(c).

There is also established jurisprudence concerning subsection 67.1(1) and paragraph 67.1(2)(c) of the Act, such as Powrmatic du Canada Limitée v. Her Majesty the Queen, 94 DTC 1206 (TCC) ("Powrmatic"), Kelowna Flightcraft Air Charter Ltd. v. Her Majesty the Queen, 2003 DTC 611 (TCC) and Les Structures G.B. Ltée v. Her Majesty The Queen, 97 DTC 1145 (TCC) ("Les Structures").

In Powrmatic, a taxpayer used a registration form and a points system to award customers trips. The more points a customer earned the less cash the customer had to pay for the trip. Tremblay, J. concluded that it was the substance of the registration form that was relevant to the determination of whether the exception in the paragraph 67.1(2)(c) of the Act was satisfied in the particular situation. Since the registration form was of sufficient detail to enable the taxpayer to determine the exact amount paid by each customer for each trip, the taxpayer could show that it had been compensated, and that the compensation was specifically identified in writing, for the food, beverages and entertainment expenses claimed.

Lamarre Proulx, J. in Les Structures G.B. Ltée remarked that paragraph 67.1(2)(c) requires "payments made by two persons: one person paid for food and is reimbursed by a payment specifically identifying the amount for food in a written document prepared by the first person for the second person."

In Kelowna Flightcraft, Beaubier, J. found that a line item for "food et cetera" on monthly bills to its two major customers satisfied the requirements of paragraph 67.1(2)(c) of the Act because the bill "states what it is for, the time period it is for and the amount due pursuant to the contract. That constitutes specific identification in writing. The ultimate proof of that is that the bills were paid ..."

Summary/Recommendation:

It has been the CRA's long-standing position, which in our view is supported by applicable case law, that in order for the exception in paragraph 67.1(2)(c) of the Act to apply, all of the conditions outlined in that paragraph must be met.

In your specific case, the Taxpayer cites Kelowna Flightcraft and believes that the meal expenses should be allowed at 100% because of the exception in paragraph 67(2)(c) of the Act. Presumably, the Taxpayer has taken the position that the meal expenses do not have to be specifically identified on the amounts billed to its clients and it is sufficient that the provision of meals is specified in the underlying contract.

In our view, the facts here are distinguished from Kelowna Flightcraft, as there is no evidence that the Taxpayer provided its clients with any specific written amounts in respect of food and beverage expenditures incurred over a specific time period. As the exception in paragraph 67.1(2)(c) is meant to apply where a taxpayer expends amounts relating to meals and entertainment for which it will ultimately bill a third person, we agree that to be entitled to deduct the expense fully, the Taxpayer would have had to specifically identify in writing the dollar amount relating to the food, beverages, or entertainment. The person, client, customer, etc. to whom the invoice is provided would then be subject to the 50% limitation in subsection 67.1(1).

We trust that the foregoing will be of assistance.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the Taxpayer. Should the Taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the Taxpayer.

Yours truly,

Randy Hewlett
Manager
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch