A simple guide to tax deductible business expenses
It’s tax season: With all of your receipts in hand, it’s time to start organizing them to file your tax return for your business.
Generally, individuals have to file their tax returns by April 30. However, if you, your spouse or common-law partner are self-employed, you have until June 15 to file your return. But be careful if you have a balance owing; the CRA begins charging interest on any unpaid amounts owing starting on May 1.
Corporations can choose any date for their fiscal year end. Tax returns must be filed no later than six months after the end of each tax year for corporations.
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What can I deduct for my business taxes?
Generally, all businesses can deduct from their income expenses that are incurred not only to make the business operational, but also to maintain that business once it is up and running.
The CRA has a list of the common business expenses that you can deduct.
The important thing is that the expenses must be incurred to earn the business income and they must be reasonable under the circumstances.
“They must be supported by original invoices,” says Chantal Trépanier of the CRA’s Liaison Officer Service.
“There is a lot that you can claim. It’s about proportion and being reasonable.”
In terms of timing, the only restriction is that expenses incurred in a business's fiscal year must be claimed against income earned in that year. There are wrinkles to this process relating to accounting methods (income or expenses secured in a fiscal year, but not actually paid until the following year, must be included, for example).
You can refer to the table below for examples of the main operating expenses you can claim when filing your taxes.
The main operating expenses you can deduct from your taxes
You can deduct expenses that preceded the operation of the business. However, you can only claim expenses if you operated the business in the fiscal period in which the expense was incurred.
You can deduct the cost of items that your business used indirectly to provide goods or services. For example, drugs and medication used in a veterinary operation, or cleaning supplies used by a plumber.
Tax, fees, licences and dues are deductible, but you can’t deduct club membership dues including initiation fees if the main purpose of the club is dining, recreation, or sporting activities.
You can deduct the cost of small items such as pencils, pens, stamps, paperclips and stationery. Do not include desks, chairs, filing cabinets and calculators because they are capital items.
For example, if your home is 1,500 square meters and your office is 300 square meters, your office is 20% of your home's total size. That means you are able to deduct 20% of many home expenses as home office expenses on your tax return.
You can deduct some expenses for heat, electricity, insurance, maintenance, mortgage interest (or rent), property taxes and “other expenses.” Again, this must be proportionate to the actual space that you are using in your home for your business.
When it comes to deducting business expenses for repairs and maintenance, you can’t deduct the value of your own labour.Check the CRA Business-use-of-home expenses webpage for more information.
You can deduct gross salaries and other benefits, such as Canada Pension Plan and Employment Insurance premiums, you pay to employees.
In most cases, the 50% limit applies to the cost of meals, beverages, and entertainment when you travel.
You can deduct rent paid for property used in your business. For example, you can deduct rent for the land and building where your business is situated.
You can deduct management and administration fees, including bank charges incurred to operate your business. Bank charges include those for processing payments.
You can deduct interest incurred on money borrowed for business purposes or to acquire property for business purposes. Check the CRA website for limits.
You can deduct property taxes for the land and building where your business is located. Note that the property tax related to business use of work space in your home has to be claimed as business-use-of-home expenses.
You can deduct expenses for telephone and utilities such as gas, oil, electricity, water and cable, if you incurred the expenses to earn income.
You can deduct all ordinary commercial insurance premiums you incur on any buildings, machinery, and equipment you use in your business. Insurance costs related to your motor vehicle must be claimed as motor vehicle expenses.
You can deduct an account receivable that won’t get paid if you had already included it as income for the year.
You can deduct expenses for advertising, including advertising on Canadian radio and television stations and in Canadian newspapers. Digital advertising is also tax deductible.
Frequently asked questions about tax deductions for businesses
A: “You cannot deduct the clothing that you will wear. Any personal expenses are not deductible,” says the CRA’s Trépanier.
A: “Penalties such as fines and parking tickets cannot be claimed,” she says.
A: You have to determine the portion that is used for business and you deduct only that, Trépanier says.
A: You can claim the cost of your cleaning staff and your cleaning supplies for your business. If you operate your business at home, you can make these deductions if they are related to your work space, according to Trépanier.
A: It can be claimed 100% at your principal place of business. However, if it’s a home office, only a portion of the Internet can be claimed for its use in your work space. You have to evaluate the time that you use the Internet for your home business.
A: Record the total number of kilometres driven from Jan. 1 to Dec. 31 and calculate the number of kilometres you have driven for business reasons, recording the date, destination and reason for each trip. For example, if you have driven a total of 10,000 kilometres in a year and you have calculated that 1,000 kilometres were for business, you can claim a 10% deduction for the use of your car, Trépanier says.
A: Generally when a person has more than one office, only the main office can be claimed as a deduction, says Trépanier.
A: Keep your receipts at least for six years because they will be needed if there is an audit.
A: Some business owners overlook expenses that should be capital costs, Trépanier says. Deduct equipment over a number of years. For example, if you buy laptops for employees deduct this equipment over its lifetime. This yearly deduction is called a capital cost allowance (CCA).
Need more help understanding your tax obligations?
The Canada Revenue Agency offers a free Liaison Officer service to owners of small businesses and self-employed individuals with in-person visits and pre-arranged seminars.
A liaison officer can answer your tax-related questions, discuss common tax errors and explain best practices.