Canadian taxpayers can minimize their tax liabilities by claiming business expenses when they file taxes. For those seeking these deductions, the Canada Revenue Agency (CRA) allows any “reasonable” business expenses.
The CRA defines this as follows. Business expenses are:
…certain costs that are reasonable for a particular type of business and incurred in order to earn income. Business expenses can be deducted for tax purposes. Personal, living, or other non-business expenses are not deductible for tax purposes.
Therefore, as a business person, you need to make sure that you distinguish between business expenses and personal expenses throughout the year. Maintaining a separate business bank account and following good accounting practices will help you do this. Here are a few more tips for making the most of your business expense deductions.
Making sure you can claim business expenses
There are a few caveats to keep in mind when thinking about claiming business expenses in Canada.
1) Note the word “reasonable” in the definition. What is a reasonable business expense for one business may not be for another. It seems sensible for a home designer to claim luncheons entertaining clients as a business expense, for example, but odd for a plumber.
The amount of the expense claimed must also be within the CRA’s reasonable expectation. If the home designer in the example above claims $800 in expenses for a single business lunch, that will raise a red flag with the CRA (and possibly get the business audited).
If you’re not sure whether or not a business expense you want to claim as a deduction is reasonable, it’s best to check with an accountant. In fact, having an accountant do your income taxes is itself a deduction related to the cost of doing business.
2) You can only deduct the part of a business expense that is directly related to your business. If you purchase and use vehicles or equipment for personal and business purposes, you must distinguish between the two and claim only the business portion. For example, if you work from home and claim your Internet fees as a business expense, you can only claim the portion of the fees to cover your business use. You cannot claim fees to cover your personal Internet use.
3) All business expenses must be supported by documentation. Other than a few exceptions with certain food and vehicle expenses, you must have receipts to support your business expense claims.
Common Business Expenses
The CRA’s Business Expense Index lists many common business expenses, from accounting to utilities, and explains the income tax deduction rules related to each expense. Some of the most common deductible expenses include motor vehicles and meal and entertainment expenses.
If you’re still concerned or have questions about claiming a particular business expense, talk to your accountant or call the CRA.
Are taxes a valid business expense?
When you claim business expenses on your T2125 form, whether you can include the GST/HST you paid in the expense you’re claiming depends on whether you’re a GST registrant and will claim the GST/HST on that expense as an input tax credit ( ITC). If you are claiming an ITC, it will reduce the expenses claimed by the amount of your tax credit on your income tax form.
In the words of the Canada Revenue Agency,
When you claim the GST/HST you paid on your business expenses as an input tax credit, reduce the business expense amounts you show on Form T2125, Business or Professional Activity Statement, by the amount of the input tax credit. Do this when the GST/HST for which you are claiming the input tax credit has been paid or became payable.
So let’s say you hired someone or subcontracted some work during the current tax year. When you were claiming your wages or fees as an expense (on the T1 income tax return Form T2125 if your business is a sole proprietorship or partnership), you would deduct any GST/HST if you had already claimed it as GST/HST paid when you filed your GST/HST return for the applicable period.
If you were not a GST registrant at the time (for example, you were a small supplier and did not have to collect or remit GST/HST), you would include the GST/HST you paid as part of your salary or subcontracting fee. since you did not receive that deduction elsewhere. Likewise, if you hired someone or subcontracted any work to someone in a province that has Quebec Sales Tax (Quebec only) or Provincial Sales Tax (PST), such as British Columbia, Saskatchewan, Manitoba, then would include that tax on your wage or fee expense claim.
Please note that you cannot claim any draft or wages paid to the business owner. Also, when claiming business expenses in Canada, if you received any other reimbursement, grant or assistance, you would subtract that amount from the business expense to which it applies.