Voluntary Disclosure to Correct Mistakes in Business Deductions
What expenses are deductible from business income? When and how are those expenses deductible? A Chartered Professional Accountant can provide you the details on specific items, but this article will provide you with an overall picture for the first question. If your business has mistakenly deducted too much or deducted something it should not have, a Voluntary Disclosure by a Chartered Professional Accountant can avoid penalties and criminal charges.
In Canada, only your business’s profitsare taxable. To get to profit you have to deduct from your revenues expenses related to the earning of those revenues. This seems simple. However, the Income Tax Act has many modifications to this wide, general rule. The modifications start with a general rule that denies any deductions for certain categories of expenses in section 18, and then allows exceptions to the general denial in other section. You will need a Chartered Professional Accountant to work through the details. However, generally, the law starts by denying any deduction at all other than to the extent the expense was made or incurred for the purpose of “gaining or producing income from a business”. Any Chartered Professional Accountant will tell you that you don’t have to earn income, only that your purpose has to be to gain or produce income. Again, it seems simple, but it can be complex in practice, raising the need to fix mistakes with a Voluntary Disclosure.
In addition to the general limitation, you also cannot deduct any expense that is a capital expense or relates to depreciation, obsolescence or depletion other than specifically allowed by the law. The deductible categories and related percentages, as well as the way you calculate the annual deduction is something your Chartered Professional Accountant can guide you through. You also can’t deduct expenses that don’t give rise to taxable amounts, amounts that relate to personal and living expenses, or amounts related to country club dues. There are some exceptions that your Chartered Professional Accountant can explain. The personal and living expense limitation often gives rise to the need for a Voluntary Disclosure.
The law, after denying deductions, carves out certain permissible ones. Some of the main allowable deductions are in section 20. This section allows deductions for capital costs to the extent allowed by the regulations, deductions for interest paid (with some other limitations), and also for repayments of shareholder loans and benefits. The last one can either be a planning tool that a Chartered Professional Accountant utilize or a mistake that needs a Voluntary Disclosure.
The concept of “profit” is deceptively simple. Get the help of a Chartered Professional Accountant to figure out what can be deducted and to fix past mistakes with a Voluntary Disclosure.
Disclaimer: Articles are for general information only and do not constitute tax advice. They cannot be relied upon.
Sam Faris is a Toronto-based Chartered Professional Accountant who practices as an independent consultant on high-level Canadian tax matters and handles disputes with CRA. He has recently published an article a business magazine: HERE.