How to write off business travel and not flag CRA
Audits are getting likelier, so it’s crucial to take the right steps, Camilla Cornell writes.
In his 23 years as an accountant, Frank Jasek has been asked by clients “more than once” whether they can write off gambling expenses in Las Vegas (no, even if they are with a client). Ditto for escort services, even though they’re legal in Nevada.
Business travel is one expense category that attracts a second look from Canada Revenue Agency (CRA), mainly because there’s potential for personal benefit, says Jasek, a partner with tax and accounting firm Prapavessis Jasek in Toronto.
RED FLAGS FOR THE TAX MAN
The CRA uses sophisticated algorithms to suss out expenses that seem out of whack.
“It’s all about percentages,” Jasek says. “When we look at clients’ expense reports, if we see more than 10 per cent allocated to travel, we ask about it. That’s a lot.”
For big businesses, that percentage should be even lower.
“They would never even get close to 10 per cent,” he says.
Jasek’s advice: look at your expense categories and try to ensure you’re not taking an overly aggressive approach to all of them. “If you’re paying your kids, deducting a home office and entertainment expenses through the year and deducting high business travel expenses, maybe you should dial it back a bit. There comes a time when you’re likely to catch the attention of the CRA.”
Even if you’re able to justify those expenses, Jasek adds, there’s still an accounting cost associated with an audit and you’re unlikely to come out ahead. BRINGING A SPOUSE CAN BE TRICKY “The rule of thumb for the CRA is to say, ‘No, no, no,’ to a spouse coming along on a business trip,” Jasek says. But there are certainly good justifications.
“If you’re meeting with a client and he is bringing his wife, it may not be good for business to go without yours,” he says.
If your spouse is there to help staff the trade show booth, that’s a writeoff. For most entrepreneurs, “the business is a family affair and the spouse is an integral part of it,” Jasek says.
“If you want to be conservative, you could claim 100 per cent of the expense for you and 80 per cent for your spouse.”
If your husband’s job is to decorate the trade show booth, however, that’s probably not a good enough reason to fly him to Hawaii. And, says Jasek, “we always say no to writing off expenses for kids.”
IN PRAISE OF THE BIZCATION
Combining a business trip with pleasure can be an excellent way to get some R&R and lower your tax bill, too. Your plane, train or mileage costs, hotel expenses and car rentals are fully deductible.
Go out with a client for dinner or a show, and you can write off 50 per cent of the associated entertainment expenses.
The caveat: The primary purpose of your trip must be business and the more planning you’ve done, in terms of setting up meetings or even coming up with a list of potential clients to cold call, the better. If you’re flying to Key West to buy office property, it’s not enough to grab a flyer from a real estate office and go to the beach, Jasek says.
CONFERENCE OR TWO WILL USUALLY DO
The rule on conferences: officially, you can write off two per year if “the business purpose of the conference makes sense,” Jasek says. “A Star Trek conference in Las Vegas is not a writeoff even if you’re a computer nerd.”
But the two-conference rule is flexible. First, more than one person from your company can attend. And if your business takes in several different segments, you can go to two conferences for each.
“I could potentially go to two accounting conferences and two tax conferences,” Jasek says, “because my business takes in both.”
Another factor: the conference must take place in the jurisdiction covered by your trade or profession, or where you do business.
“I couldn’t go to a tax conference in Europe,” Jasek says. “That has nothing to do with my work.”
The overarching factor in whether the CRA considers travel deductible is whether there’s a reasonable expectation it will help your business.
“These things are often decided on a case-by-case basis,” he says.
“If the CRA decides to challenge you, they will take the left side and you’ll take the right side. Then it’s just a question of whether the facts support it.”
Financial Post Camilla Cornell is a business writer and intrepid traveller who appreciates a little comfort when away from home. camillacornell@gmail.com Twitter.com/camillacornell