Running a home-based business in Canada is just like running any other business when it comes to income taxes. Assuming you have an income to write it off against and you follow the rules, you can deduct a host of business expenses, lowering the amount of income tax you have to pay.
One of the advantages of running a home-based business is that there are additional income tax deductions you can claim. Six of the most common deductions might apply to your situation.
Many Canadian home-based business owners use their personal vehicles as business vehicles. From a tax standpoint, this is advantageous, as you still can claim the business portion of vehicle use expenses, including:
- Fuel and oil
- Licensing and registration
- Supplemental insurance for business purposes is fully deductible. If your vehicle is not insured for business use and you have an accident while on business your insurance company is likely to deny your claim.
- Maintenance and repairs
- Interest on money borrowed to purchase a vehicle used for business. The Canada Revenue Agency (CRA) limits the amount of interest you can deduct.
- Leasing costs
- Accident repairs if you were driving for business purposes when the accident took place.
Vehicle expenses are itemized on the motor vehicle section of the T2125 Statement of Business or Professional Activities.
Tax Tip: As you can deduct only a portion of your automobile expenses when you have a vehicle that you use for both business and personal use, the CRA requires you to keep a record of the total kilometers you drive and the kilometers you drive to earn income. Your automobile expenses claims are prorated for the business portion of the total kilometers driven in a tax year. Vehicle logbooks are available from office supply stores.
You can deduct insurance premiums for buildings, machinery, and equipment you use for your business, and this includes home-based business insurance.
Home-based business insurance is separate from a person's home insurance. If you are running a business out of your home and don’t have home-based business insurance, you’re running the risk of not being covered at all if something happens, because running a home business that your insurer is not aware of may invalidate your home insurance policy.
Tax Tip: You also may write off a portion of the cost of your home insurance if your home-based business meets the conditions for claiming business-use-of-home expenses. If applicable, this expense is part of line 9945 of the T1 personal income tax form.
Even if your office is just a part of a counter in the kitchen, your home-based business has office expenses to claim. The catch here is to distinguish between office expenses such as pens, stamps, and paper clips, which you claim on line 8810 of the T1 income tax form, and depreciable assets like filing cabinets, desktop computers, laptops, mobile devices, printers, and other equipment that falls under the rules of capital cost allowance.
Because depreciable assets wear out over time, you only can claim a portion of their original cost as a tax deduction each year. How much you can claim as a tax deduction depends on what the asset or property is. CRA regulations divide depreciable assets into different classes with different percentage rates of capital cost allowance. A hub on the CRA website includes a guide to the common classes of depreciable property.
Tax Tip: You don't have to claim capital cost allowance in the year it occurs and rolling your claim forward may lower your taxes later on when you can use it to offset a higher income.
Mortgage Interest & Property Taxes
If you are carrying a mortgage on your home and running a home-based business, you can claim your mortgage interest under business-use-of-home expenses—assuming your business meets the requirements for business-use-of-home deductions.
Generally, you can deduct expenses for the business use of a workspace in your home as long as:
- the workspace is your principal place of business; or
- you use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients, according to the CRA.
If you own your own home and are running a home-based business, you also can claim your property taxes as expenses.
If you are renting, you can deduct the cost of your rent.
There is a catch, however. You only can deduct a portion of these expenses, dependent on how much of your living space and time is actually devoted to business use. Calculating the home-based business tax deduction explains how to do this step by step.
Tax Tip from the CRA: “You can use the chart "Calculation of business-use-of-home expenses" on Form T2125 to calculate your allowable claim for business-use-of-home expenses. The expenses you claim on line 9945 must not be claimed elsewhere.
Other Business-Use-of-Home Expenses
Besides mortgage interest, property taxes, or rent, there are other expenses that home business operators who qualify for business-use-of-home deductions can claim.
Some of the most common of these are:
- Maintenance and repairs
- Cleaning materials
- Internet connection
Remember, CRA allows you to deduct reasonable expenses incurred to earn income. What you claim here can’t be claimed elsewhere.
Carry Forward of Unused Work Space in Home Expenses
You can’t use business-use-of-home expenses to create or increase a business loss. If you end up with having more expenses than income for your home business, you will have what the CRA calls unused workspace in home expenses which you can carry forward into the next year.
Like the unused capital cost allowance claim, the beauty of this is that you don’t necessarily need to claim these expenses in the tax year following either. If your home business continues to meet the conditions for claiming business-use-of-home expenses, you can use these unclaimed expenses when it’s convenient to offset higher income in a later year.
All potential tax deductions are worth checking out yourself and/or discussing with your accountant—which is also is a tax deduction.