The Canada Revenue Agency ("CRA") has consistently maintained the position that the deduction of expenses related to the consumption of food or beverages or the enjoyment of entertainment is limited to 50% of the amount paid or payable in respect of such expenses under subsection 67.1(1) of the Income Tax Act (Canada) (the "Act"), regardless of a taxpayer's classification of such expenses as "advertising and promotion" or the fact that a taxpayer has not personally consumed the food and beverages or enjoyed the entertainment.1 Following the Federal Court of Appeal's recent decision in Stapley v. The Queen,2 this position also reflects the current state of the law as regards the application of subsection 67.1(1) of the Act.
The taxpayer in Stapley was a real estate agent who provided clients with gift certificates for food and beverages, and tickets to various sporting events and concerts. In computing his income for the taxation years in question, the taxpayer deducted 100% of the cost of the gift certificates and tickets, which totalled approximately $53,000 in deductions over three years.
Both the Tax Court and the Federal Court of Appeal accepted that the gift certificates and tickets were marketing expenses incurred by the taxpayer aimed at building and maintaining client relationships to generate income from his business. Both Courts further accepted that the taxpayer neither consumed the food or beverages, nor attended the sporting events or concerts. The Tax Court concluded that because the taxpayer did not participate in the consumption or enjoyment, the amounts expended by the taxpayer to acquire the gift certificates and tickets were in respect of earning income, and not in respect of the consumption of food or beverages or the enjoyment of entertainment.
In contrast, the Federal Court of Appeal determined that the statutory language used in subsection 67.1(1) of the Act did not create a requirement of taxpayer consumption or enjoyment. Therefore, the 50% limitation applied to the deductibility of the gift certificate and ticket expenses incurred by the taxpayer.
Interpretation of Subsection 67.1(1)
In providing its interpretation of subsection 67.1(1) of the Act, the Federal Court of Appeal relied on the Supreme Court of Canada's approach to statutory interpretation as laid out in 65302 British Columbia Ltd. v. The Queen,3 and most recently in Canada Trustco Mortgage Co. v. The Queen.4 Specifically, in determining whether the taxpayer's expenses were caught by subsection 67.1(1) of the Act, Sexton J.A. stated that it was incumbent on the Court to consider:
- the grammatical and ordinary sense of the words of the provision (the "plain meaning approach");
- the scheme of the Act; and
- the nature of the mischief that the provision was designed to address.
(a) The Plain Meaning Approach
The Federal Court of Appeal found that nothing in the grammatical or ordinary sense of the wording in subsection 67.1(1) of the Act limited its application to those circumstances in which a taxpayer actually participated in the consumption of food and beverages or in the enjoyment of entertainment. Furthermore, Sexton J.A., quoting from the Supreme Court of Canada's decision in Nowegijick v. The Queen,5 indicated that "the phrase 'in respect of' [as used in subsection 67.1(1) of the Act] is probably the widest of any expression intended to convey some connection between two related subject matters."6
Accordingly, notwithstanding that the taxpayer incurred the food and entertainment-related expenses for business purposes, the Court held that such expenses were nonetheless "in respect of" the consumption of food and the enjoyment of entertainment.
(b) The Scheme of the Act
The Federal Court of Appeal went on to examine the legislative framework surrounding subsection 67.1(1) of the Act. Sexton J.A. noted almost a dozen specific exceptions to the application of the provision. Based on the statutory context, he reasoned that Parliament has expressly turned its mind to allowing the deduction of expenses in respect of food and entertainment under certain circumstances, and that had Parliament intended for marketing expenditures of the kind claimed by the taxpayer to fall outside the scope of subsection 67.1(1) of the Act, it would have done so expressly by providing a specific exception to that effect.
The Court further noted that at least two of the exceptions to the 50% limitation suggested that subsection 67.1(1) of the Act effectively contemplate consumption or enjoyment by persons other than the taxpayer claiming the deduction.7 Therefore, the Court concluded that the statutory scheme did not require a taxpayer to consume the food or enjoy the entertainment in respect of which an expense was incurred in order for such expense to be subject to the 50% limitation on deductibility.
(c) The Object or Legislative Purpose Behind Subsection 67.1(1) of the Act
Paragraph 18(1)(a) of the Act allows taxpayers to deduct expenses incurred to earn income from a business or property, provided such expenses are reasonable in the circumstances. Subsection 67.1(1) of the Act, in turn, limits the amount that can be claimed as a deduction pursuant to paragraph 18(1)(a) with respect to food, beverage and entertainment expenses.
In the opinion of the Federal Court of Appeal, subsection 67.1(1) of the Act recognizes that meals and entertainment involve an element of personal consumption. Therefore, allowing a full deduction for such expenses would allow the deduction of the portion of the expense that is of a personal nature. The difficulty in Stapley, as recognized by the Federal Court of Appeal, was that the taxpayer did not consume any of the food or beverages or enjoy the entertainment. Arguably, by deducting the cost of the gift certificates and tickets, the taxpayer was not seeking to obtain a deduction for expenses of a personal nature. Therefore, the taxpayer did not run afoul of the mischief which subsection 67.1(1) of the Act sought to prevent.
In resolving the inconsistent result obtained under the various interpretive approaches, the Federal Court of Appeal followed the Supreme Court's guidance in 65302 British Columbia Ltd. and Canada Trustco that where the words of a provision are clear and unambiguous, the ordinary meaning of the words takes precedence over a court's view of the object and purpose of the provision. Accordingly, the Court held that the taxpayer's expenditures were caught by subsection 67.1(1) of the Act.
1. See for example CRA document no. 2004-0088721E5, "Gifts of Beverages," (October 25, 2004); CRA document no. 2003-0000025, "Gifts of Food, Meals and Entertainment," (March 6, 2003).
1. 2006 F.C.A. 36.
3.  3 S.C.R. 804.
4. 2005 S.C.C. 54.
5.  2 S.C.R. 428.
6. Stapley v. The Queen , 2006 F.C.A. 36 at paragraph 15.
7. Paragraphs 67.1(2)(a) and (d) of the Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.