A Simple Guide for Allowable Business Expenses

As a business owner, you know that running a company costs money. There are many expenses which small businesses can deduct in order to cut down on their taxes, if they were incurred to earn income. When you’re working with a tight budget, these tax deductions can make a big difference to your bottom line.

Accounting & Legal fees

This includes fees for accounting, tax and bookkeeping services, or legal fees paid to gain a right to collect a salary or wages.

Advertising

Depending on the advertising method used by your small business, advertising expenses can either be fully or partially written off.

Online advertising is fully deductible; including your website’s domain name registration and web hosting.
Canadian television, radio, magazines and newspaper advertising is deductible..
If you advertise with a non-Canadian broadcaster, then these expenses cannot be written off.

Naomi Dukart, CPA, CGA is a professional accountant and tax practitioner.

Contact Naomi today for a complimentary consultation to answer any questions or concerns regarding allowable business expenses and tax deductions.

Contact

Business Start-Up Costs

To deduct a business start-up expense, you need to have carried on the related business in the fiscal period in which the expense was incurred. Because of this, you have to be clear about the date your business started.

Business Tax, Fees, Licenses and Dues

Tax, fees, licenses and dues are deductible including;

Any annual license fees and business taxes you incur to run your business.
Annual dues or fees to keep your membership in a trade or commercial association.
You cannot deduct club membership dues including initiation fees if the main purpose of the club is dining, recreation, or sporting activities.

Capital Assets

Capital assets are written off over a period of time-based on the CRA’s specified depreciation rates. Some of the most common expenses and depreciation rates for 2020 include:

Building (4% per year)
Furniture and equipment (20% per year)
Computers and computer equipment (55% per year)
Vehicles (30% per year);

Home Office Expenses

If you work from a home office, you will be eligible for deductions on certain home-office related expenses including;

Mortgage interest
Rent
Utilities
Property taxes
Repairs & maintenance
Home insurance

To claim these expenses as deductions, your home must meet one of the following conditions:

The space is your main place of business
You use the area on a regular basis, only to earn business income

Home-office expenses are determined by the percentage of the home office as a percentage of the total size of your home.

Insurance

There are several different types of insurances that qualify as tax deductible including;

General Business Liability insurance for potential lawsuits
Business Property insurance for business assets
Business Interruption insurance for losses related to fires, floods and natural disasters
Life Insurance for key employees or collateral for a business loan

Interest and Bank Charges

As a business, you might take out loans or owe money to vendors. Often, these agreements include fees. You can deduct:

Interest on vehicle or property loans
Interest on business loans
Bank charges
Service charges

Meals and Entertainment

The maximum amount you can deduct for the amount that you spend on meals, beverages and entertainment is 50% of either the amount you incur or an amount that is reasonable in the circumstances, whichever is less.

The cost of meals and entertainment for staff events or parties is 100% deductible up to a maximum of 6 events per year.

Office Supplies

Every month, you buy a variety of supplies to keep your business running. This includes:

Paper
Pens and pencils
Letterhead
Stamps
Cleaning supplies
Push pins and paperclips
Do not include desks, chairs, and filing cabinets as they are capital items.

Prepaid Expenses

A prepaid expense is an expense you pay ahead of time. If you use the accrual method of accounting, claim any expense you prepay in the year or years in which you receive the related benefit.

Salaries, wages, and benefits

You can deduct gross salaries and other benefits including:

Canada Pension Plan
Employment Insurance premiums
Workers Compensation
Sick-pay, disability, and income insurance plan premiums

You can also pay your spouse or child if they work in your business. Their salaries are tax-deductible, as long as:

You pay the wages or salary
They do work that’s necessary for the business
You pay a reasonable rate given the person’s age and contribution

Travel Expenses

Travelling expenses include food, beverage, lodging and transportation expenses such as airplane, train, bus, etc., but does not motor vehicle expenses. You can deduct travelling expenses as long as you meet all of the following conditions:

You were required to work away from your place of business
You had to pay your own travelling expenses
You did not receive a non-taxable allowance for travelling expenses

You can deduct food and beverage expenses if your work requires you to be away for at least 12 consecutive hours from the municipality and the metropolitan where you normally report for work.

The 50% limit also applies to the cost of food and beverages you paid for when you travelled on an airplane, train, or bus, as long as the ticket price did not include these amounts.

Vehicle Expenses

As a small business owner in Canada, you can deduct vehicle expenses including;

Fuel & oil
Insurance
Parking fees
Repairs & maintenance
Vehicle registration fees
Capital Cost Allowance (if you own)
Lease payments (if you lease)

The percentage of the vehicle operating costs that can be deducted is calculated by dividing the total kilometers driven for business purposes by total kilometers driven in the year. For example, if the vehicle was driven 8,000km for business purposes during the year and 10,000km in total, then 80% of the vehicle operating costs can be deducted. To substantiate the distance driven for business, a daily log must be kept. The daily log should include the date, location, distance in kilometers, and purpose of each trip.

Keep those Receipts

Accurate books and records ensure that all expenses are captured on your business’ financial statements and personal tax return. This way, nothing is missed. Make sure you retain all receipts for claimed business expenses - if you are audited or otherwise asked to provide receipts to support your claims and you cannot provide them your claims will likely be disallowed. The receipts must also be kept for six years in Canada. While you won't be sending them in when you file your income tax online, the CRA can demand to see them at any time.

Conclusion

In conclusion, tax write-offs will ultimately help save you money by reducing your business’ taxable income and taxes payable. Consult your accountant to find our which tax-write offs you could be taking advantage of.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals.