A question that business owners ask themselves is “What expenses are deductible?”. There is often a desire to have a list of business expense categories that they can refer to and be safe in knowing that what they are claiming as an expense is legitimate. The risk, of course, of getting it wrong is a tax audit by the Canada Revenue Agency (CRA) that results in denied expense, interest, and penalties.
The CRA provides a brief a business expense list that has categories of expenses. The list of typical business expenses on its website. The list includes the following:
- Advertising
- Allowance on eligible capital property (note that this has changed recently)
- Bad debts
- Business start-up costs
- Business tax, fees, licenses and dues
- Business-use-of-home-expenses
- Capital Cost Allowance
- Delivery, freight, and express
- Fuel costs (except for motor vehicles)
- Insurance
- Interest charges
- Maintenance and repairs
- Management and administration fees
- Meals and entertainment
- Motor Vehicle expenses
- Legal, accounting, and other professional fees
- Prepaid expenses
- Office expenses
- Other expenses
- Property taxes
- Rent
- Salaries, wages, and benefits
- Supplies
- Telephone and utilities
- Travel
The list is not an exhaustive list of how a business expense can be categorized and accountants will have other categories for certain expenses. However, just because an expenditure seems to fit into one of the listed categories doesn’t mean that it is deductible. There are other pre-conditions and limitations that apply to all expenses generally before they are deductible. There are also specific limitations on certain types of expenses. In practice, this means that figuring out whether or not an expense is deductible can be difficult, and it takes more than just fitting an amount into a business expense category.
The starting point for any business income (or property source of income) expense deduction is the idea of “profit”. What expenses have to be taken away from revenues to determine how much profit a particular business made or a property produced. When making this initial determination, we have to remember that HST/GST is not something you can deduct as part of the expense if you are a HST/GST registrant and claim Input Tax Credits. HST/GST and Input Tax Credits are something we will consider in a different article. Once these two initial rules are considered things get more complicated.
This article is part of a series that is here to help business owners figure out whether or not an expense is deductible for income tax purposes. The next two articles in this series will take you through the most common Income Tax Act limitations on expense deductions for business and property income. Although the articles are providing a more detailed guide than most they, like for all things in life that are complicated, cannot provide an answer for your particular circumstances or for all cases. Always consult with a tax professional to see what expenses are deductible, when, and to what extent in your own circumstances.
