Let’s Start with the very basics:
A tax deduction is any reasonable current business expense you paid or will pay to earn income that the Canada Revenue Agency (CRA) lets you subtract from your total taxable income, reducing the amount of income tax you pay. If you are GST/HST registered, you must reduce the amount of the business expense by the GST/HST that you paid (this is your input tax credit to be claimed against the GST/HST collected).
What are business expenses?
According to CRA, money spent running your business is considered a business expense, and you can claim it on your tax return as a deduction. Tax-deductible business expenses generally fall into three categories:
1-Things you use exclusively in operating your business. A landscaper uses sod and mulch to provide landscaping services. A dog training service needs leashes, collars, and treats. A bookkeeper needs stationary supplies and software.
2-Things you use exclusively for your business in the space where your business operates. If you rent office space, the signage, rent and utility costs you incur are a business deduction.
3- Things you use while doing business. If you use your car to drive to client meetings, you can deduct the round-trip mileage from your place of business to the client as a business expense – but only if you keep a mileage log.
The most common tax deductions for small businesses:
Business start-up costs. Start-up costs for your business can include anything your business needs to launch, from equipment, machinery, and supplies to legal and accounting advice. For a start-up cost to be eligible for a tax deduction, it must occur during the tax year (or fiscal period) your business started, make certain you are clear about your business start date.
Marketing fees. Materials used to market your business and the cost of developing these materials. Examples include business cards, flyers, signage, branded promotional items, trade shows, design fees, and printing costs.
Advertising fees. These include the cost of ads on Canadian radio and television stations and in Canadian newspapers. Digital advertising is also tax-deductible, as is the cost of registering your website’s domain name and web hosting.
Business supplies. The cost of items that your business uses to provide goods or services. For example, grooming supplies used by a hair salon, or tools used by a plumbing service.
Office supplies. Small items such as pencils, pens, stamps, paper clips, stationery as well as the cost of the cleaning supplies. However, they don’t include desks, chairs, filing cabinets, and printers, they are capital items.
Rent. You can deduct rent paid for property used in your business, including the rent for the land and building where your office is located.
Home office. Small business owners often work off-hours from home, this could be a business deduction. For example, if your home is 2,000 square meters and your office is 400 square meters, your office is 20% of your home’s total size. This means that you may be able to deduct 20% of your home office-related expenses as a business expense. If you are renting office space for your business, you cannot claim any home office expenses.
Telephone and internet. Telephone, cell phone, cable and internet are all deductible IF these expenses are related to business activities.
Utilities. Expenses for heat, electricity, insurance, maintenance, mortgage interest, and property taxes. For home offices, deductions must be in line with the actual size of the space you’re using for your business (based on the area or percentage of business space-exclusive of common areas vs total house size).
Salaries, wages, benefits. Deduct gross salaries and other benefits, such as the Canada Pension Plan (CPP) and Employment Insurance (EI) premiums you pay to employees.
Independent contractors. If you hire independent contractors or freelancers for any business-related purpose—such as taking product photos for your online store or writing posts for your company blog—this cost is a tax deduction.
Meals and entertainment. Deduct 50% of the amount that you spend on meals and entertainment. For example, if you take your client to lunch, you can deduct 50% of the cost from your business income. CRA doesn’t consider a mostly liquid meeting to be eligible and will disallow any predominantly liquid containing receipts.
Travel. Usually, you can write off 50% of the cost of meals, beverages, and entertainment. Travel expenses include public transportation fares – not that private jet you wanted a ride in, hotel accommodation and meals.
Delivery and shipping costs. If what you’re mailing or shipping is business-related, you can deduct the cost of postage, envelopes, P.O. Box rental fees, and delivery services like XpressPost, FedEx and UPS.
Professional fees. Fees for legal, accounting, bookkeeping and external consulting are all deductible small business expenses.
Motor vehicle expenses. In addition to claiming round-trip mileage and parking fees on business-related meetings and excursions, you may be able to claim license and registration fees. Other examples include fuel and oil costs, insurance, maintenance and repairs, and leasing costs. The interest on money borrowed to buy a motor vehicle is a deductible expense, however, the cost of the vehicle can only be written off over time through Capital Cost Allowance (CCA). The mileage driving back and forth between home and regular place of business IS NOT a business expense. You must keep a mileage log, either paper or digital for CRA to accept motor vehicle expenses. This is something that is requested regularly by CRA when reviewing expenses, and without one, all expenses may be denied. Something to keep in mind regarding use of a company owned vehicle is Standby Charges. If your business use of a company owned vehicle is less than 70%, CRA requires a calculation of the taxable benefit you are receiving by having access to a company vehicle each year. The standby charge is based on the purchase price of the vehicle and doesn’t change no matter the age or condition of the vehicle.
Accounting and software. If you’re self-employed or run your own small business, software charges for POS, client management, bookkeeping, mileage tracking, cloud storage, etc. are eligible deductions.
Some less well- known business deductions:
Business tax, fees, licenses, and yearly dues for commercial or trade organizations. Although the previous items are deductible, your club membership dues or any fees if the main purpose of the club is dining, recreation, or sporting activities are not.
Bank charges. This includes any management and administration fees, including bank processing fees and the cost of ordering cheques on your business accounts.
Interest. Incurred on money borrowed for business purposes or to acquire property for business purposes. If your LOC, HELOC, mortgage or loan is used for both business and personal CRA will only allow the interest on the verifiable business debt interest. Check the CRA website for limits.
Property taxes. For the land and building where your business is located. Property tax related to workspace used for business purposes in your home must be claimed as a business-use-of-home expense.
Insurance. All ordinary commercial insurance premiums you incur on any buildings, machinery, and equipment you use in your business.
Bad debt. Think of bad debt as any amount you’re not able to collect from whoever owes you money. You can only deduct a bad debt (account receivable) that won’t get paid AND if you’ve already included it as income for the year. You can also deduct the cost of recovering balances owing to you, such as the cost of a lawyer or collection service.
Private health services plan premiums. Payments that are made for you or for your employees and their dependents.
Now for some non-deductible expenses:
Your labour. When deducting business expenses for repairs and maintenance, you can’t deduct the value of your own labour.
Fines and penalties. Parking ticket? Speeding ticket? ATM fees at the casino? Late fees on your tax return? All of these are non-tax-deductible expenses.
Commuting costs. While traveling to business meetings or client sites throughout the workday is deductible, traveling to and from your home is not.
Clothing. Anything which would be considered street clothing is not a business expense. Even if you weren’t caught dead in a suit outside business hours, you’re still not permitted to write it off. Ditto for dry cleaning. A few exceptions: if you wear a uniform or special safety clothing.
Golf club dues and gym memberships. Nice to have, good for your health, and a great way to meet new clients, but unfortunately, not deductible. If the main purpose of your club is dining, recreation or sport-related, you can’t deduct membership dues or initiation fees.
Life insurance premiums. Life, health, and disability insurance premiums aren’t tax-deductible for businesses or individuals.
Maintenance and repairs. You can deduct the cost of labour and materials for any minor repairs or maintenance done to property you use to earn business income. What you CANNOT claim is the following: The value of your own labour, repair costs that are capital in nature (capital expenses), any repair costs which have or will be reimbursed whether through insurance or cost sharing means. For repairs that are capital in nature, the cost will be recovered over time when claiming a capital cost allowance on the asset repaired. Any repairs or maintenance made related to business use of workspace in your home must be claimed as business-use-of-home expenses.