What Can I Claim for Business Expenses on Canadian Income Tax?
What to Know When Claiming Business Expenses
Question: What can I claim for business expenses on Canadian income tax?
When claiming business expenses, the Canada Revenue Agency (CRA) allows any reasonable business expense. To be considered a reasonable expense, the item has to be appropriate to your business and used in an attempt to make money.
The CRA says business expenses are "certain costs that are reasonable for a particular type of business, and that are incurred for the purposes of earning income.
Business expenses can be deducted for tax purposes. Personal, living, or other expenses not related to the business cannot be deducted for tax purposes."
Therefore, as a business person, you need to be sure to distinguish between your business expenses and personal expenses throughout the year.
Keeping a separate business bank account and following good accounting practices will help you do this.
3 Important Points About Claiming Business Expenses
There are some caveats to bear in mind when you’re thinking about claiming business expenses, however.
1) Note the word reasonable in the definition. What is a reasonable business expense for one business may not be for another. It may make perfect sense for a writer or café owner to claim Internet Service Provider fees as a business expense, for example, but it seems odd for a bakery.
2) It's only the portion of a business expense that’s related directly to your business that can be deducted. If you buy and/or use vehicles or equipment for both personal and business purposes, you have to distinguish between the two and only claim the business portion.
3) All business expenses need to be supported by documentation. You have to have receipts to back up your business expense claims. For more on this, see Can I claim business expenses that I no longer have receipts for?
Common Business Expenses
The Business Expenses Index lists many common business expenses and explains the income tax deductions rules relating to each expense.
If you're still worried or doubtful about claiming a particular business expense, talk to your accountant and/or give the Canada Revenue Agency a call.
Do You Include Taxes When Claiming Business Expenses?
When you're claiming business expenses on your T2125 form (Business or Professional Income form), whether or not you include the GST/HST that you paid on the expense you're claiming depends on whether or not you're a GST registrant and have/will be claiming the GST/HST on that expense as an Input Tax Credit. If you're claiming it as an Input Tax Credit, deduct it from your claimed expense 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 amounts of the business expenses you show on Form T2125, Statement of Business or Professional Activities, by the amount of the input tax credit. Do this when the GST/HST for which you are claiming the input tax credit was paid or became payable."
So if you hired someone or subcontracted some work to someone sometime during the current tax year, when you were claiming their wages or fees as an expense (on Form T2125 of the T1 income tax return if your business is a sole proprietorship or a partnership), you would deduct the GST/HST if you had already claimed it as GST/HST paid out when you filed your GST/HST return for the appropriate period.
If you were not a GST registrant at the time (i.e. you were a Small Supplier and did not have to collect and remit GST/HST) you would include the GST/HST that you paid out as part of the wage or subcontract fee.
And if you had hired someone or subcontracted some work to someone in a province that has PST (Provincial Sales Tax; i.e. British Columbia, Saskatchewan, Manitoba) or QST (Quebec Sales Tax), then you would include that tax in your expense claim for wages or fees.
Note that you cannot claim any drawings or salaries paid to the owner of the business. (Should you even be paying yourself a business salary? See Business Salary or Dividends - Which Is Better?)
Also, when claiming business expenses, if you received any other rebate, grant, or assistance you would subtract the amount of that rebate, grant or assistance from the business expense to which it applied.