Common Business Deductions:
Current as of October 2015
As long as you’re advertising to a Canadian market, you can deduct the full cost, unless you’re using a foreign broadcaster (there are special rules for this). When advertising in a periodical, the issue you’re advertising in has to be at least 80% original content (of the non-advertising content). If the original content is less than 80%, then you can only deduct 50% of the cost. It would be wise to ask the editor how much of their content is taken from other publications.
You cannot deduct expenses for advertising directed mainly at a Canadian market when you advertise with a foreign broadcaster.
Bad debt is money owed to you that you cannot collect. If you figure that a client isn’t going to pay off their account, but you’ve already included that account as receivable income, it can be deducted as bad debt.
Business tax, fees, licenses, dues, memberships, and subscriptions
The only time you cannot deduct a membership fee is if it is for a club whose main purpose is dining, recreation, or sporting activities. But most of the rest are valid: license fees, business taxes incurred to run the business, annual dues, and membership fees in trade or commercial associations.
When you use personal property for business use, the business portion of those expenses can be deducted.
In order to qualify for this expenditure category your home office must meet one of the following two criteria:
- it is your principal place of business; or
- you use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients
Although you may qualify to take Capital Cost Allowance (CCA) on a portion of your home we strongly suggest you don’t as this can complicate the “principal residence” exemption on sale.
The “part” or “portion” of each expense you can claim, depends on the size of the space used for business. Here’s how you calculate it:
- Take the square footage of your business area and divide it by the total square footage of your home.
- Multiply that by each expense.
- This is your business space portion.
You also need to consider that the space is not used for business all day, every day, so calculate the portion of hours worked.
- Divide the total work hours in a day by 24 (hours).
- Multiply the result by the business space portion.
- This is your business hours’ portion.
Finally, you have the business portion of your home expenses. After all of that, make sure that the business portion of your home expenses doesn’t create or increase a business loss. So if you are already claiming a loss, you can’t claim the business portion of your home expenses (but you can generally carry this forward).
Capital cost allowance
When you buy a new building for the business, or furniture, a vehicle, or equipment, you cannot deduct the full cost in that year. Even when you do renovations and make improvements to property you already own, you may not be able to deduct the full cost.
But you can deduct a percentage of the depreciating value of any capital expenses. This is the Capital Cost Allowance. The CCA can be deducted over a period of several years for each expense depending on the class the asset falls under. Some typical deduction amounts:
- Class 10 (autos): 30% annually
- Class 8 (equipment): 20% annually
Current or capital expenses
By now you can see that some expenses are treated differently than others. That’s because of the classification we mentioned in the beginning: current expenses or capital expenses.
- Current expenses recur after a short period of time.
- Capital expenses give you lasting benefit or advantage.
That’s why the cost of new equipment is a capital expense; it’s a lasting benefit. But utilities are current because they recur after a short period of time.
There are subtle differences in other areas. Getting your carpets cleaned would be a current expense. Getting new carpet installed would be a capital expense. The CRA provides an excellent chart breaking down the differences between current and capital expenses:
Delivery, freight, and express
The cost of delivery, freight and express used for your business, in your tax year, can be fully deducted.
Fuel costs (except for motor vehicles)
If you heat or power your business with fuel (gas, diesel, propane), those can be fully deducted. Same as motor oil and lubricants used for machinery in your business.
This isn’t for motor vehicles, though. They have special rules (addressed later).
Any ordinary commercial insurance on buildings, machinery, and equipment can be fully deducted. However, life insurance cannot be claimed unless it is collateral on a loan, in which case you may be able to deduct a limited part of the premium.
Insurance paid on your home (if you work from home) and your auto are subject to the specialized rules for those expense categories.
Interest and bank fees
Claiming interest expenditures can be tricky. Generally speaking, you can deduct interest on loans used to fund activities that will generate business or property income. This includes mortgages on buildings that are fully utilized in your business operations, lines of credit that are used to fund your day to day business activities and bank fees paid to maintain your business’ bank accounts.
There are special rules limiting interest on several transactions and situations such as:
- Interest paid on auto loans
- Interest paid to purchase vacant land
Certain types of interest and fees cannot be expenses such as:
- Interest paid on money borrowed to pay income taxes
- Penalties paid to the CRA for tax infractions
- Mortgage interest paid on the non-business portion of your home
Other types of fees must be deducted over a 5-year period:
- application, appraisal, processing, and insurance fees;
- loan guarantee fees;
- loan brokerage and finder’s fees; and
- legal fees related to financing.
Deducting interest can be very tricky, even if an amount appears to be clearly related to your business there may be limitations so it’s best to check with your accountant first.
Legal, accounting, and other professional fees
Fees you paid for external professional advice or services (including consulting fees) can be fully claimed. If you were reimbursed for professional fees, though, reduce your claim accordingly.
If the fees were for professional help in buying property, they are considered a part of the cost of the property, which must be capitalized to the cost of the property and subsequently claimed as a CCA.
Maintenance and repairs
Labour and materials for minor repairs or maintenance can be claimed if they were made to property you use to generate income. You cannot claim the value of your own labour, and if the repair is considered a capital expense, then materials are a part of the CCA.
Management and administration fees
Bank charges and other management or administration fees to operate your business can be deducted.
Meals and entertainment
You can deduct expenditures related to meals and entertainment (such as food, beverages, sporting events etc.) The maximum amount you can expense is 50% of the lesser of:
- The actual amount paid
- An amount that is reasonable in the circumstances
The limitations above do not apply in all situations. For example, the full cost of meals and entertainment can be deducted when:
- Your business provides meals and entertainment to customers for compensation (i.e. a restaurant, hotel etc.)
- You bill your clients for these amounts and they show as a detail on your bill
- In some cases, when you include the expense as a part of an employee’s income.
- The expenses were for an office party or similar event and all your employees are invited (max 6 such events per year)
- You incur the expenses in connection with a fundraising event that benefits a registered charity
Meals and entertainment can be a tricky area of tax so it’s important to keep track of these expenses and keep all your backup.
Motor vehicle expenses
Expenses to be deducted for your vehicle vary depending on the type of vehicle you are using, whether it is purchased or leased and the amount of personal vs. business use. Purchasing a vehicle is a capital cost so you need to calculate the CCA as you would any other capital asset. Leasing a business vehicle is considered a current expenditure but is subject to several limitations. Any parking fees or other auto maintenance costs for business use can be deducted fully subject to the actual use in your business.
If your vehicle is for personal and business use, deduct only the business part of the expense. For this you’ll have to keep a record of the kilometers you’ve driven for business and the total kilometers driven.
Expenses that you can deduct for your vehicle are:
- license and registration fees
- interest on loans to buy the vehicle
- maintenance and repair costs
- leasing costs.
Generally speaking, you can deduct the full cost of your auto expenditures up to the % use for business vs. the % use in total calculated on a per KM basis.
Purchased autos must be capitalized and depreciated but will fall under two different classes of CCA dependent upon the purchase price of the vehicle. Autos purchased for less than $30,000 (not including HST) are capitalized to class 10 and depreciate at a rate of 30% per year on a declining balance (½ depreciation in year 1). Autos purchased for $30,000 or more (not including HST) are added to class 10.1 which is limited to a $30,000 cap. Depreciation is taken once again at 30% per year (½ depreciation in year 1).
Supplies like pens, pencils, paper clips, stamps and stationery can be claimed. However, equipment like calculators, filing cabinets, chairs and desks qualify as capital items.
Some expenses you may pay ahead. For example, if you pay a full year of rent, from July 2015 to July 2016, you can claim the 2015 portion on your 2015 taxes and the 2016 portion on the 2016 taxes.
Taxes on business property can be fully deducted. Property taxes for your home office will fall under the home office rules.
Rent for a business building or business equipment can be deducted.
Salaries, wages, and benefits (including employer’s contributions)
The gross salaries, including other benefits you pay to employees, can be deducted. Your share of CPP and EI, WSIB premiums, and premiums paid to employees for a sickness, an accident, a disability or an income insurance plan can be claimed under most circumstances (generally your insurance provider will provide detailed guidance on this).
Supplies used indirectly to do business can be claimed, like cleaning supplies used by a plumber.
Telephone and utilities
As long as it’s an expense incurred to earn income, telephone and utilities, such as gas, oil, electricity, and water, can be deducted.
Public transportation fares, hotel accommodations, meals and other travel expenses to earn an income can be deducted. Although only 50% of meals, beverages, and entertainment costs can be claimed (see that section above), including such expenses when served on a bus, train or plane (when the costs aren’t included in the ticket price).
Here are other expenses that are commonly claimed as “Other Expenses” on a tax return:
- Costs for making your building accessible to people with disabilities.
- Leasing costs for computers, cell phones, fax machines or similar equipment. But only a reasonable portion.
- Cell phone airtime can also be claimed if it incurs a cost.
- Lease payments on property used in your business
- You can deduct costs for up to two business conventions per year subject to certain conditions
- Allowable reserves, contingent accounts, or a sinking fund can be deducted within reason and within the restraints of the Income Tax Act.
- Private health services plan (PHSP) premiums can be claimed, but there are significant restrictions there too.
Don’t let the amount of regulations and restrictions scare you off. Deducting expenses correctly will help you keep a healthy business.
Many businesses end up paying too much in taxes because they don’t claim expenses they are eligible for. Other businesses run into trouble because they deduct expenses that are specifically disallowed. It always helps to have a professional look over your finances and taxes to make sure that you are getting the full benefit of deductions.
If you want to talk taxes and find out if you could be saving more money during tax season, give us a call. We’ll be able to examine your business and help you plan out a tax strategy that keeps the tension low when tax time arrives.