Meals and Entertainment Tax in QuickBooks Online: the Canadian Split

Canadian users of QuickBooks Online keep running into the same wall when they record meals and entertainment. Tax rules allow an input tax credit on only half the GST or HST paid on those costs. The standard rates in the software claim all of the tax, or none of it. The workaround that settled the discussion builds the missing split by hand, from two custom rates and a group.

The gap, in plain terms

Canada’s tax system lets a business recover the GST or HST paid on ordinary business purchases. Meals and entertainment are the exception: only half of the tax paid on them qualifies for recovery. The disallowed half simply stays in the cost of the meal. QuickBooks Online applies its standard rates in full, with no notion that a client lunch differs from a box of printer paper. The result is a return that overstates the credit, or a manual adjustment every filing period.

Can QuickBooks Online do this on its own?

Not out of the box. No Canadian edition ships with a meals and entertainment rate. The software does, however, let you create custom rates and combine rates into a group, and that is enough to reproduce the split. The setup lives in the Sales Tax centre and takes a few minutes. One trap first: subscriptions that include payroll show a Payroll Tax option in the same area. Choose Sales Tax, not Payroll Tax, or you will be working in the wrong place.

The half you can claim

Open the sales tax overview and select the manage sales tax option. On the Canada Revenue Agency card, add a custom rate. Name it something explicit, such as GST 2.5% liability. Mark it as a tax you pay on purchases, and set the purchase rate to 2.5%. Assign it to a liability account, and set the return line to input tax credits. Save the rate, then make it inactive right away. Inactive rates vanish from your forms, but a group can still call on them.

The half you cannot claim

Create a second custom rate the same way. Name it GST 2.5% expense so the two are impossible to confuse. Keep the purchase rate at 2.5%, again marked as paid on purchases. This time choose the non-tracking option for the account, because this portion never appears on a return. Save it and make it inactive as well. Both halves now exist, and neither will clutter a dropdown.

Joining both halves in one group

From the same screen, select add tax and find the group rate section. Name the group Meals and Entertainment, or M and E for short. Put the liability rate in the first component slot and the expense rate in the second. Leave both set to apply on the net amount, which is the default. Save the group and check that it holds exactly two component rates. This group becomes the tax code you pick on meal and entertainment expenses.

The split on an actual bill

Apply the group to a hundred dollar client lunch and QuickBooks records the full 5% of GST. Half of it lands in the liability account and shows on the return as a claimable credit. The other half is non-tracking, so it stays inside the cost of the meal. There is no journal entry and no month-end correction. The return claims what the rules allow, and the disallowed half sits in the expense where it belongs.

What changes in an HST province?

We have left out a province by province list on purpose. The method is identical everywhere; only the percentages move. In harmonized provinces, the 50% limit applies to the combined rate, not just the federal slice. A 13% HST province therefore uses two custom rates of 6.5% each. A 15% province uses 7.5% each. The liability account, the non-tracking account, the group, and the net amount setting all carry over untouched.

Provinces with a separate provincial sales tax need one more thought. The half-and-half restriction belongs to the GST and HST system, so a provincial retail tax, where one applies to meals, should be set up as its own rate. Quebec runs a matching restriction through its own sales tax, and the same two-rate pattern extends to it.

The step people skip

Making a brand new rate inactive feels like undoing the work. It is the opposite. Inactive component rates stay out of the dropdown lists on invoices and bills, so nobody picks a half rate by mistake. The group still reaches them. Skip this step and your forms offer three tax choices where one should be.

A workaround, not a feature

This setup is a workaround rather than a built-in capability, and it behaves like one. It travels with your file, needs no maintenance, and can be retired the moment a purpose-built rate appears. Until then, two hidden halves and one visible group give Canadian books the split that the default rates cannot.