Insightful Accountant International: Easy Meals/Entertainment Tax Codes in QBO-Canada (Pt. 1)

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As we draw ever closer to the kick-off of our International ProAdvisor Awards program Insightful Accountant is expanding our 'International' coverage. One way we are doing this is by asking ProAdvisors from outside the United States to contribute features based upon (1) issues they see with their own 'country versions' of QuickBooks, (2) training experiences they've had with QuickBooks, or (3) in working with small business clients using QuickBooks. If you are a QuickBooks ProAdvisor living outside the USA, please contact us if you would like to contribute an article. Now let's look at Esther's feature about QuickBooks Canada.

Easy Meals and Entertainment tax codes for QBO in Canada

Often, when I deliver QBO certification training in Canada, I am asked how to create a Meals & Entertainment (“M&E”) tax code for GST/HST1 input tax credits on expenses at restaurants. Time does not allow me to go off course when I’m training, so I usually direct students to this Intuit knowledge base article. Personally, I think it’s too convoluted, so I’ve been promising that I’ll write an article that offers an easier approach. My bad; I kept promising and never delivered. My procrastination ends now with this two-part feature. In Part 1 we look at the principle behind the method along with setting it up and using it in my own province of Ontario. Then next time we take the method 'on the road', to make sure it works elsewhere within Canada using QuickBooks.

The Logic Behind My Approach

Let’s take a simple example for a restaurant in Ontario, where I live. It's probably better for me to start with 'what I know best, like dining out near home' before I try to make this work somewhere else in Canada. So we will pretend the bill for one of my local restaurants is $113 including the 13% HST and there was no tip added to the credit card expense.

Now in QBO, I need to create a tax code that puts $6.50 into input tax credits based on a $106.50 base. That is simple enough:

Setting It Up for my Home Province of Ontario

To set it up for Ontario, I click on Taxes in the left navigation bar (and if we’re running QBO Payroll, I click on the Sales Tax sub-menu). Then I click on Manage sale tax so that I can add this new M&E Ontario tax code to the Canada Revenue Agency sales taxes.

Then, in the Canada Revenue Agency section, I click on Add rate.

I call this tax code “M&E ON” and check the box next to “I pay this on purchases” to open up the detail under it:

After I populate the fields (tax rate as calculated above, Liability account, tax amount on return line Input tax credits (ITCs), I then click Add.

Trying It Out

Now let’s test it out. Let’s take the same Ontario restaurant example as above, but this time there’s a $15 tip, making the total credit card expense $128.

To enter this expense easily in QBO, change the preference at the top of the Category details grid to Amounts are Inclusive of Tax:

  • The pre-tip total of $113 is entered on the first line, and the M&E ON tax code is used. It’s easy to know this number because it’s the total on your restaurant bill, including sales tax, and before adding a tip.
  • The tip amount of $15 (that you decided on the amount and added to the credit card receipt) is entered on the second line, with the tax code as Exempt (per this knowledge base article).

Wow...everything worked perfectly! And just to prove it, here is the behind-the-scenes transaction journal.

In Part 2 we will visit my old friend Marnie Stretch who lives in Alberta, well symbolically at least... and make certain that this 'easy method' works elsewhere in Canada, not just in my home of Ontario. So, please come back for my next installment.

Footnotes (for Non-Canadian Readers)

1 - GST/HST: Goods and Services Tax (GST) and Harmonized Sales Tax (HST).