GST on Meals Adjustment

by Michelle
(Canada)

Adjusting the GST/HST for meals ... and how to book the tip paid for a meal

What account would you debit to adjust the GST/HST for the amount that is not eligible for the ITC (50%) on meals?

I think GST would be credited for the liability but where does the offset go? Would it go directly to the shareholders account?

Hi Michelle,

In QuickBooks, I setup a Meals HST tax code group as follows:

First I setup two new sales tax item. One called ITC for Meals 50% and another called ITC Meals to Expense.

Next, I create the sales tax group called ITC Meals 50% selecting the two new accounts I created above.

Finally, I create a new sales tax code M for meals.

Let's say I attended an IPBC Regional Dinner Meeting in B.C. where HST is 12%. I had a $20 meal and gave a 15% tip. Let's also say I charged the amount $25.76 (20 x 1.12 x 1.15) to my business credit card. QuickBooks makes the following entry:

DR Meals-50% Claimable (tax code M) $20.00 --- for bookkeeping purposes, you book 100% of the meal cost. The 50% ineligible portion is handled when the tax return in prepared. It is not reflected on the financial statements.
DR GST/HST Payable $1.20 --- because I selected tax code M
DR Meals-Not Claimable** $1.20 --- because I selected tax code M so the 50% of the ITC that is not claimable is expensed and cannot be claimed on your income tax return
DR Meals-50% Claimable (tax code E for exempt) $3.36 --- for tip
CR Credit Card $25.76

You'll notice I broke out the tip amount paid for the meal because tips are GST/HST exempt.

Hope that helps. If you are not using QuickBooks, hopefully your software can do something similar.

**Editor's Note** - see postings below explaining CRA's 1998 change of interpretation from their 1992 opinion in the deductability of non-claimable ITCs. This sub-account is discussed in the posts below.

P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

Comments for GST on Meals Adjustment

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Jan 30, 2012

Meals & Entertainment
by: Sharon

I met a client for a coffee to discuss his books.

I posted the following:

DR Exp Acct - Travel, Meals (50%) 4.50
DR Liab Acct - GST Pd (Full ITC Paid) .23
CR Owner Contrib - Paid with per. funds 4.73

Should I adjust this entry and follow your suggestion?

DR Exp Acct - Travel, Meals (50%) 4.50
DR Liab Acct - GST Pd (50% ITC) .11
DR Exp Acct - Travel, Meals to be Exp .12
CR Owner Contrib - Paid with per. funds 4.73

If I understand correctly, following this bookkeeping entry I will not have to make any year-end adjustments to the books.

Jan 30, 2012

GST ADJ. ON MEALS
by: Anonymous

So the amount that is not eligible as an ITC is then just expensed to meals, correct?

Jan 30, 2012

Book vs Tax for ITC Not Claimable
by: Lake

Just to clarify, I should have mentioned that you should expense the non claimable portion to a separate sub-account to make it easier to report the amount on your T2 to meals which should be net of tax.

So for book purposes, the non claimable portion of the ITC is still a business expense. For tax purposes on Schedule 1 Line 121, you need to report the non deductible meal expense net of tax ... i.e. meals not including sales tax amounts.

Jan 30, 2012

ITC adjustment
by: Lake

Sharon,

You can choose to record the ITC non-claimable portion on every entry or you can wait until year-end and make one adjusting entry for the year.

I discussed in the December 2011 issue of The Bookkeeper's Notes that Ernst and Young mentioned in their articles that most people forget to do the annual adjustment and it gets "caught" during a GST audit by CRA.

This is why I now do the entry everytime I book the receipt ... but it is still perfectly okay to wait and do it as a year-end adjusting entry.

Also just a side note - You showed your account as Travel, Meals (50%). I don't recommend combining travel and meals mainly to make tax reporting easier.

Feb 01, 2012

100% ITCs on Reimbursable Meals
by: Lake

I attended a webinar today and the point was brought up that you can claim 100% of ITCs for meal expenses that are reimbursed.

It was a good point. For other items where the 50% limit does not apply, see this chat which also applies to corporations.

Anyway, the presenter preferred to make the annual adjustment rather than each entry throughout the year so they could ensure 100% ITC claimable amounts were not booked at 50%.

Either method is correct. It is your preference and what works most efficiently for you.

Feb 08, 2012

Adjusting 50% limitation on Food, Beverage & Ent. Expense
by: Sharon, Calgary

I am trying to do a year-end adjustment for 50% of the ITC's for the year 2011.

The original GST amount charged and paid is $0.23. I need to add back 50% of the GST to the GST paid on Purchases account in the amount of $0.115 and book $0.115 to the non-claimable ITC account.

Simply accounting only allows a maximum of 2 decimal places so I am unable to balance the books. I am out $0.01.

Would you have any suggestions how I can balance or get around this problem?

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Sharon when that happens, manually change the tax by the amount you are out ... or my preference is to adjust a non-taxable amount by the rounding error such as the tip.

Feb 16, 2012

HST and Claiming Meeting Expenses
by: Kyle J. from St Catharines ON

If I meet with a client and we have lunch, I can claim 50% of the bill. But does that include the HST?

Also, can I claim half or all of the tip I leave?

Thanks!

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Hey Kyle,

Check out this forum posting on one way to record your HST ITCs for meals ... AND read the posting and comments above.

There are two different ways to handle the HST pertaining to meals and entertainment expenses. You decide if your HST ITCs will be adjusted with every meal receipt (follow the link above) or left to year-end as an annual HST adjustment.

When booking meals and entertainment expenses, you can include the tip ... BUT make sure it is coded as tax exempt and not lumped in with the meal which includes the tax ... AND the tip must be reasonable.

Do all bookkeepers and accountants handle it this way? Probably not. Some may decide the amount isn't material and just enter it in one amount and apply the tax. They expect that if they are audited, these amounts will probably be adjusted by the CRA auditor.

When your accountant prepares your tax return, they will only claim 50% of the meals including 50% of the tip.

This means, when you are doing your books, you should be recording 100% of your meals ... the 50% reduction is taken at tax time.

Sometimes, people can get mixed up between what is a legitimate business expense and what is tax deductible. Just because something is not tax deductible does not mean it is not a legitimate business expense.

For some reason, some people think not tax deductible means "personal" expense not "business" expense. In my opinion, not true. It just means not tax deductible.

For example, a business owner buys all his staff lunch once a month when they have their staff meeting.

Is this a legitimate business expense? Yes.

Is it a reasonable business expenses? Yes as long as it is pizza, or soup and sandwiches, or ... you get the idea ... reasonable and not over the top.

Is it tax deductible? No not all of it. So just make sure you have 2 sub categories - one for staff meals tax deductible and another for staff meals not tax deductible.

P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

Feb 16, 2012

Meals and Taxable Benefits
by: Lake

I forgot to mention when discussing meals that there are rules about free meals for employees that can create a taxable benefit.

See CRA website> Payroll> Benefits and allowances> Meals - overtime and subsidized for more information.

Mar 10, 2012

Summary Table of GST and Meals
by: Lake

Keith Anderson, CPA-CA's website has an excellent article on Business Meals/Entertainment and GST Issues which discusses 50% rule under section 67.1 of the Income Tax Act and GST legislation in the Excise Tax Act.

One of the reasons this area is so confusing is CRA revised their 1992 opinion in 1998 on what the business gets to deduct.

At the very end of Mr. Anderson's article he has a table summarizing the effect of the old and new CRA interpretation.

I am approximating his table here. Assume $100 meal with 12% HST.

OLD CRA Interpretation:

Net HST ITC Claim = 50% of HST = $12 x 50% = $6

Allowable Deduction = (Total Cost of Meal - Net HST ITC Claim) x 50% = ($112 - $6) x 50% = $53.00

Effect = You were allowed to expense for tax purposes the portion of the ITC not claimable; $3 (50% x $6) in this example.

NEW CRA Interpretation:

Net HST ITC Claim = 50% of HST = $12 x 50% = $6 (no difference from old interpretation)

Allowable Deduction = (Total Cost of Meal x 50%) - Net HST ITC Claim = ($112 x 50%) - $6 = $50.00 = 50% of the cost of the meal excluding sales tax

Effect = You are NOT allowed to expense for tax purposes the portion of the ITC not claimable; $3 (50% x $6) in this example. Make sure you code the non-deductible portion of the ITC ($6) to a separate sub-account so it is not included on the tax return figures. It is still a business expense, just not a deductible business expense.

You can find Mr. Anderson's article under Tax> Tax Tips.

Jul 20, 2012

HST Quarterly Filer--50% ITC Adjustment for Meals
by: Tina

Love your site; frequent it often and now I need some help please!!!

I have a new client who is my first quarterly remitter. I've printed off the HST return for a quick look at my numbers.

I know I have to make an adjustment to the ITCs, line 107 for the 50% rule for meals and entertainment (M & E). Where do I get my numbers from? I did a quick report for M & E to get a total. Do I extract the tax out; /1.12 and half that? Kinda stumped. Help!!

Thanks very much.

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Hey Tina,

I just want to make you aware that you don't have to adjust your GST/HST for meals and entertainment every quarter. If you want, you can make the adjustment at yearend.

When you make the adjustment, you need to be careful NOT to assume the whole M & E amount is taxable as some of the amounts likely include tips which are not taxable.

You haven't said what software program you are using ... but if it is possible to modify a report, print your M & E account ... customizing it to add a column showing you the total of the tax and/or the tax code so you can make your calculation.

Does that make sense?

Jul 02, 2017

Adding back the GST-HST non-deductible amount
by: Cheryl

Good day,

Wish you and yours are well.

I have a client who remits their GST-HST yearly. I would like to know whether one adds back the 50% GST-HST (non-deductible amount) into income before the GST-HST Remittance and before completing the T2 Return? This is, of course, a question regarding bookkeeping vs tax reporting.

Your immediate assistance would be truly appreciated.

Thank you.

Jul 02, 2017

Cheryl
by: Lake

It is my understanding that the non-deductible portions of GST/HST are omitted from tax preparation meaning you have a permanent difference.

See the above posts on CRA's 1998 interpretation of the deductibility of non-claimable ITCs.

Jul 02, 2017

Thank You!
by: Anonymous

Thank you, Lake! This information is very helpful. :)

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