This much is true: If you’re an entrepreneur, you have expenses. And if you incur those expenses in order to get more business, then those expenses are tax-deductible.
However, in their infinite wisdom, the kind folk over at CRA (Canada Revenue Agency) have determined to make Meals and Entertainment expenses only 50% deductible. Their logic, as I understand it, goes like this. If you take a client to a nice restaurant, the pleasure they derive from that fine meal is fully deductible. Your portion of the culinary treat, on the other hand, is on your own dime.
Hence the 50% deduction. And that’s the bad news.
The even worse news, though, applies to those that are GST/HST registered. CRA, driving the point to its logical conclusion, goes on to say that you can only claim 50% of the tax on that meal. Yes, you read right. When it comes to meals and expenses, you cannot claim the full GST or HST amount.
And so, in order to stay compliant with CRA’s rules and regs, this means you’ll have to set up a special sales tax in QuickBooks Online (QBO) that captures only 50% of the total tax amount.
Here’s how to do it.
Step 1: With QBO running, click on Sales Taxes (in the left-hand Navigation Bar).
Then, in the Sales Tax window (below), click on Add tax.
Step 2: In the Add tax window, select Tax rate
Setting it all up is actually quite easy. Just keep in mind that, in order for QBO to properly calculate the tax amount, you’ll need to set up two taxes, each of them for 50% of the actual tax paid. The first tax you set up will track the amount of HST you’re entitled to receive as a refund (CRA calls it Input Tax Credit). The other tax you set up will treat the non-deductible portion as an expense
Also note, in this example, the assumption is your business is in Ontario and is therefore subject to 13% HST.
Okay? Great! Let’s move on.
Step 3: In the Add tax window (from Step 2) enter a tax name and description for the refundable portion of tax. Note we’re using M as the Tax name. “M”, for meals obviously.
Next, select Receiver General as the tax agency.
Now, click the Purchases checkbox, enter 6.5% as the tax rate, and select Liability as the type of account. Then, in the Show tax amount on return line field, choose Input tax credit (ITCs).
Now click Save to close the window and proceed to the next step.
Step 4: Repeat Steps 1 and 2 and QBO will bring you back to the Add tax window. And this time you will set up the non-refundable portion of the HST amount.
As in Step 3, enter a Tax name (in this example “M Exp” which is an abbreviation for Meal Expense) and then enter a description. Once again choose Receiver General, click the Purchases checkbox, and enter 6.5% as the tax rate. This time though, in the Account field, choose Expense. Finally, click Save.
Step 5: In this last step, you need to group the two taxes that you set up in Steps 3 and 4. To do that, as explained in Step 1, click Add tax, and then select Group rate.
Enter a name and description, such as 50% HST, for the grouped tax, and then choose the two tax rates that you created in Steps 3 and 4. Make sure to select Net amount for each of the tax rates. Click Save and you’re done,
To use your new sales tax rate–in an Expense form for example–just select it in the sales tax field. In this example, we have a restaurant receipt for $113 which includes $13 HST.
In this window you can clearly see the background journal entry confirming that QuickBooks is treating 50% of the total HST as a refundable amount, with the other 50% going to an expense account. Which will make the kind folk over at CRA nod in admiration of your efficient bookkeeping practices.