Canada’s Business Expense and Tax Deduction Rules

February 23, 2018 | Written by: Sohail Afzal

Tax Accounting Services Toronto

As a small business, it is important to understand the deductible business expenses that can help you lower your tax bill. Each business expense that can count as a tax deduction has rules that have to be followed strictly. Working with a qualified tax accountant certainly helps when you want to maximize deductible business expenses and save money in the process.

The common deductible business expenses include:

  • Legal and accounting fees
  • Advertising costs
  • Vehicle expenses
  • Bank charges
  • Bad debts
  • Business licenses
  • Collection agency fees
  • Interest expenses only applies to money borrowed to run the business
  • Insurance expenses
  • Membership fees
  • Meals and entertainment expenses
  • Office rent and lease charges
  • Repair and maintenance costs
  • Salaries of employees
  • Home-based business expenses
  • Travel expenses
  • Telephone expenses
  • Utilities

If you are operating a home-based business, there’s a separate list of expenses that your business can deduct. However, you can only deduct a portion of these expenses and not the full amount. For instance, you can only deduct a portion of your electricity bill or interest on the mortgage payment.

Does Your Business Qualify for Tax Credits?

Other than the deductions, your business may also qualify for certain tax credits. For instance, if your business is engaging in activities that involve scientific research and experimental development, then there are tax credits for all the eligible activities in this process. You may also be eligible for a tax credit if you acquire certain property or on specific expenditures. For instance, you can get tax credits for hiring apprentices in your organization. This investment tax credit is equal to 10% of their salaries and wages. If you use property for designated activities such as manufacturing goods or extracting oil and natural gas, you may also qualify for property tax credit.

Capital Cost Allowance

Another way to lower your tax bill is to deduct certain costs such as the cost of depreciating capital assets like buildings, vehicles, and furniture used by your business. Capital cost allowance deductions need to be calculated properly and the properties or assets should be eligible for tax credits. One important step is to keep all receipts of any business expenses just in case you are audited or asked to provide them to support your claim. Claims are often denied when you are asked to provide receipts and fail to do so.

If you are not sure about a tax deduction, always ask your accountant or check with the CRA. Sometimes being too aggressive when listing the business expenses to get tax deductions can attract an audit. This is particularly the case if you run a sole proprietorship, construction business or manufacturing chain. Remember that you are also required to have a reasonable expectation of profit when running your business. Therefore, you cannot deduct all business expenses and report losses year after year without ever showing that your business is becoming profitable. Things like this often attract the attention of the CRA.

Sohail Afzal CPA Toronto

Sohail Afzal, CPA, CMA, MBA

Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.

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