Claiming Business Expenses in Canada
What to Know When Claiming Business Deductions
Canadian taxpayers can minimize their tax obligations by claiming business expenses when they file taxes. For those seeking these deductions, the Canada Revenue Agency (CRA) allows any "reasonable" business expense.
The CRA defines this as follows. 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. Here are a few more tips for making the most of your business expense deductions.
Ensuring You Can Claim Business Expenses
There are some caveats to bear in mind when you’re thinking about claiming business expenses in Canada.
1) Note the word "reasonable" in the definition. What is a reasonable business expense for one business may not be for another. It seems sensible for a home designer to claim lunches entertaining clients as a business expense, for example, but an odd thing for a plumber.
The amount of the expense claimed also has to fall within the CRA's expectation of reasonable. If the home designer in the previous example is claiming $800 in expenses for a single business lunch, that's going to raise a red flag with the CRA (and possibly get the business audited).
If you are unsure whether a business expense you want to claim as a deduction is reasonable or not, it's best to check with an accountant. In fact, having an accountant do your income taxes is a deduction itself related to the cost of doing business.
2) You can only deduct the portion of a business expense that’s directly related to your business. If you buy and use vehicles or equipment for both personal and business purposes, you have to distinguish between the two and only claim the business portion. For instance, if you work from home and are claiming your internet fees as a business expense, you can only claim the portion of fees to cover your business usage. You can't claim fees to cover your personal internet use.
3) All business expenses need to be supported by documentation. Apart from some exceptions with certain meal and vehicle expenses, you must have receipts to back up your business expense claims.
Common Business Expenses
The CRA's business expenses index lists many common business expenses—from accounting to utilities—and explains the income tax deductions rules relating to each expense. Some of the most common deductible expenses include motor vehicle and meals and entertainment expenses.
If you're still worried or doubtful about claiming a particular business expense, talk to your accountant or call the CRA.
Are Taxes a Valid Business Expense?
When you're claiming business expenses on your T2125 form, whether you can include the GST/HST that you paid on the expense you're claiming depends on whether you're a GST registrant and will be claiming the GST/HST on that expense as an Input Tax Credit (ITC). If you're claiming an ITC, you'll lower your claimed expenses by the amount of your tax credit 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, say you hired someone or subcontracted some work 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 any 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 (for example, 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 since you didn't receive that deduction elsewhere. Likewise, if you had hired someone or subcontracted some work to someone in a province that has Quebec Sales Tax (Quebec only) or Provincial Sales Tax (PST), such as British Columbia, Saskatchewan, Manitoba, 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. Further, when claiming business expenses in Canada, if you received any other rebate, grant, or assistance you would subtract that amount from the business expense to which it applied.