6 Home Based Business Tax Deductions You Don't Want to Miss
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.
But one of the advantages of running a home based business is that there are additional income tax deductions that you can claim. What follows is not an exhaustive list, but rather six of the most common Canadian home based business tax deductions. How many of these apply to you?
Many Canadian home based business owners use their personal vehicles as business vehicles. From a tax standpoint this is advantageous, as you can still claim the business portion of vehicle use expenses, including:
- Fuel and oil
- Licensing and registration
- Insurance - note that supplemental insurance for business purposes (which you should have) 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 you borrow to buy a motor vehicle, automobile, or passenger vehicle you use to earn income” (Canada Revenue Agency). Note that there is a limit to the amount of interest you can deduct on money you borrow to buy a passenger vehicle.
- Leasing costs
- Accident repairs - if you have a car accident while driving for business purposes you can deduct the entire cost of the repairs
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 Canada Revenue Agency (CRA) requires that you keep a record of the total kilometres you drive and the kilometres you drive to earn income to “support your claim”. Your automobile expenses claims are prorated for the business portion of the total kilometers driven in a tax year.
In the example they give in Business and Professional Income, they actually use these figures to figure out how much the deductible business expenses are. (“Paul’s” business kilometres are divided by his total kilometres driven and multiplied by his total vehicle expenses to form the basis of his claim.) Vehicle log books are available from office supply stores.
Learn how you can keep a simplified logbook for income tax purposes.
For more information on claiming vehicle expenses see What Motor Vehicle Expenses Can You Claim on Income Tax in Canada?
As “you can deduct all regular commercial insurance premiums you incur on any buildings, machinery, and equipment that you use for your business”, (T4072 Small Business Information Seminar Module III Income Tax), home-based business insurance should qualify.
Home-based business insurance is essentially commercial in nature and is entirely separate from a person's home insurance. (In fact, 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).
So you'll definitely want to get home-based business insurance for your own protection - and then use it as a business deduction.
Tax Tip: You may also 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 (see 4. Other Business-Use-of-Home Expenses below). If applicable, this expense would be part of the expenses that you claim on line 9945 of the T1 form).
Even if your office is just a part of a counter in the kitchen, your home-based business will have office expenses to claim. The catch here is to distinguish between office expenses (things such as pens, stamps and paper clips, which you claim on line 8810 of the T1 income tax form) and depreciable assets (things such as filing cabinets, desktops/laptops, mobile devices, printers, and other equipment which fall under the rules of Capital Cost Allowance).
Because depreciable assets wear out over time, you can only 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; the Income Tax Regulations have divided depreciable assets into different classes with different percentage rates of Capital Cost Allowance. This Capital Cost Allowance hub on the Canada Revenue Agency's site includes a guide to the common classes of depreciable property.
Tax Tip: You don't have to claim Capital Cost Allowance in the year that it occurs and rolling your Capital Cost Allowance Claim forward may lower your taxes later on when you can use it to offset a higher income. For more on this see 8 Small Business Tax Strategies to Reduce Income Tax.
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 work space in your home as long as:
- the work space 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 (Canada Revenue Agency).
If you own your own home and are running a home-based business, you can also claim your property taxes as expenses.
If you are renting, you can deduct the cost of your rent.
There is a catch, however; you can only 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 Canada Revenue Agency: “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 and/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, “you can deduct any reasonable current expense you incur to earn business income” (Canada Revenue Agency) for your home-based business. But, as you read in point 4, you can only deduct the portion of these expenses related to business use and what you claim here can’t be claimed elsewhere. No double dipping!
Tax Tip: From the Canada Revenue Agency: “Purchases and business expenses must... be substantiated with a sales invoice, agreement of purchase and sale, a receipt, or some other voucher that supports the expenditure.”
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. So if you end up with having more expenses than income for your home business, you will have what the Canada Revenue Agency calls unused Work Space 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, “an indefinite carry forward is provided” (CRA) meaning that you can use these unclaimed expenses when it’s convenient to offset higher income in a later year.
Like everything else related to taxes, meticulous records are a must; all your deductions need to be documented with receipts. But if you have a home-based business, these are tax deductions you don’t want to miss.
There are many other income tax deductions available to small businesses in Canada that you can read about in these articles:
- The Most Overlooked Tax Deductions for Canadian Small Businesses
- Business Expenses Index for Canadian Businesses
- Canadian Income Tax FAQs for Small Businesses
- How to Complete the T1 Canadian Income Tax Form as a Business
- How to Calculate Capital Cost Allowance
- Canadian Income Tax and Your Small Business
- Guide to Income Tax for Canadian Corporations
- Investment Tax Credits for Canadian Small Businesses
All potential tax deductions are worth checking out yourself and/or discussing with your accountant – which is also a tax deduction!