What classifies as a business expense in Canada? For many Canadian business owners and entrepreneurs, understanding what qualifies as a business expense can be a tad tricky. Yet, it’s essential knowledge for anyone aiming to maximize their tax deductions and keep their financial affairs in good shape, i.e., business owners, entrepreneurs, contractors, influencers, and side hustlers.
In this post, we will break down common business expenses, delve into various business expense categories, and shed light on the process of writing off business expenses.
What is a Business Expense?
Simply put, a business expense is any cost you incur to earn business income. It’s the money you spend to keep your business running. These are expenditures that are necessary, reasonable, and directly tied to the operations and growth of your venture. The Canadian Revenue Agency (CRA) recognizes these costs and allows businesses to deduct them, effectively reducing taxable income.
Deductible Business Expenses – What’s Allowable?
The CRA has specific guidelines on what can be counted as deductible business expenses. Here’s a look at some of the most common ones:
Rent and Lease
Whether it’s the space for your office or equipment for operations, if you’re renting or leasing them, the cost is a business expense. This includes the office rent, payments on leased machinery, and even storage space.
Salaries and Wages
If you employ staff, their salaries, wages, and other related employment expenses like benefits or vacation pay can be counted as business expenses.
Supplies
Everyday supplies that your business uses – be it stationery, cleaning materials, or industry-specific goods – fall under their respective business expense categories.
Professional Fees
Hiring Faris CPA, a lawyer, or a consultant? Our fees are deductible business expenses.
Advertising and Promotion
Costs related to marketing your business, from digital ads to branded giveaway swag and merch, can be written off.
Interest and Bank Charges
Interest on loans taken for business purposes, credit card charges, and other related banking fees qualify as business expenses.
Travel and Entertainment
Travel costs related to your business, such as flights, accommodations, or meals, are deductible. However, ensure that the primary purpose of the trip is business-related.
Training
Costs to train yourself or your employees to improve skills for the business are deductible.
How to Write Off Business Expenses
To capitalize on the benefits of writing off business expenses, it’s crucial to maintain meticulous records. Here are some steps:
Keep Detailed Records
Every time you incur a business expense, keep the receipt. Clearly mark the business purpose, especially if it might not be immediately apparent.
Use Dedicated Business Accounts
Having separate accounts for your business ensures there’s a clear line between personal and business expenses. This is arguably the most important of tax tips for business owners.
Categorize Business Expenses
Regularly sort expenses into their respective business expense categories. This not only helps during tax time but also provides a clearer picture of your financial health.
Consult with Professionals
Working with an accountant can help ensure you’re not overlooking any deductible business expenses and that you’re compliant with CRA regulations. They also provide crucial business insights by analyzing your financial statements and can help you:
- Shore up financial inefficiencies.
- Find grants and other programs you may be eligible for and help you apply for them.
- Secure funding through investment and/or financing by preparing your financials.
- Make informed decisions regarding growth, expansion, and other strategic decisions.
Also, a chartered professional accountant is crucial for resolving tax disputes favourably.
Beware of Non-Deductible Business Expenses
While the CRA is somewhat understanding in its recognition of business costs, and many costs might seem like they should qualify as business expenses, not everything can be written off.
Personal expenses, capital expenses (like major renos to a property that extend its useful life or improve it beyond its original condition), and certain fines or penalties are typically non-deductible.
Additionally, while meals and entertainment expenses can be written off to an extent, there are limits. Typically, only 50% of these costs can be deducted, with some exceptions. Always consult the CRA’s guidelines or a tax professional to ensure you’re making appropriate claims.
Capital Property: A Deeper Look
Capital property is essentially any property that can generate income for a business or individual over a more extended period, usually beyond a year. This can range from real estate and buildings to equipment, machinery, and even certain intangible properties like patents and goodwill.
For taxation purposes, when you sell or dispose of capital property, you might make a capital gain or incur a capital loss. This gain or loss is the difference between the property’s initial purchase price (or “adjusted cost base”) and the amount for which it was sold, after accounting for any related selling expenses.
Business Expense Reporting: Corporate vs. Partnership & Sole Proprietorship Tax Returns
Business structures in Canada influence how financial matters, including business expenses, are reported. Let’s briefly understand the differences between corporate tax returns and those for partnerships and sole proprietorships.
- Corporations. A corporation is considered a separate legal entity and as such, files its tax return using the T2 Corporation Income Tax Return. Business expenses and incomes are reported entirely under the corporation’s name. It’s imperative to note that any salaries or wages paid to shareholders or owners are also reported and are considered business expenses.
- Partnerships. Partnerships involve two or more individuals or entities coming together to run a business. While the partnership itself doesn’t pay income tax, it still must file a partnership information return, which details the income and expenses. Each partner then reports their share of the partnership’s income or loss on their individual tax returns.
- Sole Proprietorships. A sole proprietorship is an unincorporated business owned by a single person. Business expenses and incomes for sole proprietorships are reported using the T1 Individual Income Tax Return, under the T2125 Statement of Business or Professional Activities form. It is directly integrated with the business owner’s personal finances.
Whether you’re a sole proprietor, in a partnership, or run a corporation, it’s always a good practice to stay informed or seek professional advice to navigate Canada’s financial landscape effectively.
Periodically Review CRA Guidelines Regarding
As with many tax-related matters, guidelines for what is a business expense can evolve. Periodically reviewing the CRA’s guidelines ensures you remain updated and can adjust your expense tracking as needed.
The Key to Business Expenses in a Nutshell
In Canada, understanding business expenses is key to maintaining healthy finances and optimizing tax savings. By keeping thorough records, categorizing expenses, and staying updated with CRA guidelines, you can make the most of your deductible business expenses.
