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Business Expenses for Tax Deduction

Business Expenses for Tax Deduction Canada

As a rule, you can deduct any reasonable expense you paid or will have to pay to earn business income. The expenses you can deduct include any GST/HST you incur on these expenses. However, you cannot deduct personal expenses.

Deduct only the business part of expenses from business income. In addition you cannot claim expenses you incur to buy capital property.

Advertising expenses | Allowance on eligible capital property | Bad debts | Business start-up costs | Business taxes, fees, licences, dues, memberships, and subscriptions |

Business-use-of-home expenses | Computer and other equipment leasing costs | Capital cost allowance | Convention expensess | Current or capital expenses | Delivery, freight, and express | Fuel costs | Insurance | Interest | Leasing costs | Legal, accounting and other fees | Maintenance and repairs | Management and administration fees | Meals and entertainment | Motor vehicle expense | Office expenses | Prepaid expenses | Property taxes | Rent | Salaries, wages, and benefits | Supplies | Telephone and utilities | Travel

Please note that the above list of business expenses is not all inclusive. If the item you’re thinking of using as a business tax deduction isn’t on this list, that doesn’t mean it’s not a legitimate business expense. Check with your accountant or with the CRA if you’re in doubt about the tax deduction potential of a particular business expense.

Advertising expenses:

You can deduct expenses for advertising, including ads in Canadian newspapers and on Canadian television and radio stations. You can also include any amount you paid as a finder’s fee.

However, certain restrictions apply to the amount of the expense you can deduct. If your advertising is directed to a Canadian market and the original editorial content in the issue is:

  • 80% or more of the total non-advertising content in the issue, deduct 100% of the expense or
  • less than 80% of the total non-advertising content in the issue, deduct 50% of the expense

You cannot deduct expenses for advertising directed mainly to a Canadian market when you advertise with a foreign broadcaster.

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Allowance on eligible capital property:

You may buy property that does not physically exist but gives you a lasting economic benefit. Some examples are goodwill, franchises, concessions, or licences for an unlimited period. We call this kind of property eligible capital property.

You cannot deduct the full cost of an eligible capital expenditure, since it is a capital cost and gives you a lasting economic benefit. However, you can deduct part of its cost each year. We call the amount you can deduct your annual allowance.

We consider franchises, concessions, or licences with a limited period to be depreciable properties, not eligible capital properties. See Capital Cost Allowance (CCA).

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Bad debts:

You can deduct an amount for a bad debt if you:

  • determine that an account receivable is a bad debt in the year and
  • had already included the receivable in income

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Business start-up costs:
For an amount to be deducted as an expense incurred for the purpose of gaining or producing income from a business, the taxpayer must have been carrying on business in the Fiscal period in which the expense was incurred.

Where a taxpayer proposes to undertake a business and makes some initial expenditures with that purpose in mind, it is necessary to establish whether the expenditure preceded the start of the business or whether the business had in fact begun and there were expenses incurred during preliminary steps leading to the start of normal operations.

Consequently, the date when the business can be said to have commenced must be known.

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Business taxes, fees, licences, dues, memberships, and subscriptions:
You can deduct any annual licence fees and business taxes you incur to run your business. You can also deduct annual dues or fees to keep your membership in a trade or commercial association.

You cannot deduct club membership dues (including initiation fees) if the main purpose of the club is dining, recreation, or sporting activities.

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Business-use-of-home expenses:

You can deduct expenses for the business use of a work space in your home, as long as you meet one of these conditions:

  • it 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.

You can deduct a part of your maintenance costs such as heating, home insurance, electricity, and cleaning materials. You can also deduct a part of your property taxes, mortgage interest, and capital cost allowance. To calculate the part you can deduct, use a reasonable basis such as the area of the work space divided by the total area of your home.

If you use part of your home for both your business and personal living, calculate how many hours in the day you use the rooms for your business, then divide that amount by 24 hours. Multiply the result by the business part of your total home expenses. This will give you the household cost you can deduct.

If you run the business for only part of the week or year, reduce your claim accordingly.

The capital gain and recapture rules will apply if you deduct capital cost allowance on the business use part of your home and you later sell your home.

If you rent your home, you can deduct the part of the rent and any expenses you incur that relate to the workspace.

The amount you can deduct for business use of home expenses cannot be more than your net income from the business before you deduct these expenses. In other words, you cannot use these expenses to increase or create a business loss.

You can deduct the lesser of the following amounts:

  • any amount you carry forward from the previous year, plus the business use of home expenses you incur in the current year or
  • the amount on line j of Form T2124 or line g of Form T2032

In your next fiscal period, you can use any expense you could not deduct in the current year, as long as you meet one of the two previous conditions. You also use the same rules.

You can use the chart “Calculation of business use of home expenses” on Form T2124 or Form T2032 to calculate your allowable claim for business use of home expenses.

The expenses you claim on line 9945 must nSot be claimed elsewhere on Form T2124 or Form T2032.

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Capital cost allowance:

You might acquire a depreciable property to use in your business or professional activities, such as:

  • a building
  • furniture or
  • equipment

You cannot deduct the cost of the property when you calculate your net business or professional income for the year.

However, since these properties wear out or become obsolete over time, you can deduct their cost over a period of several years. The deduction for this is CCA. See Capital Cost Allowance (CCA).

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Computer and other equipment leasing costs:
You may lease:

  • computer
  • cellular telephones
  • fax machines and
  • other equipment

If so, you can deduct the percentage of the lease costs that reasonably relates to earning your business income.

You can also deduct the percentage of airtime expenses for a cellular telephone that reasonably relates to earning your business income.

If you buy a computer, cellular telephone, fax machine, or other such equipment, you cannot deduct the cost.

You can deduct Capital Cost Allowance and Interest you paid on money you borrowed to buy this equipment that reasonably relates to earning your business income.

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Convention expensess:

You can deduct the cost of going to a maximum of two conventions a year. The conventions have to:

  • relate to your business or your professional activity and
  • be held by a business or professional organization within the geographical limits of where the sponsor of the convention usually does business

This second limit may not apply if an organization from another country sponsors the convention, and if the convention relates to your business or professional activity.

Sometimes, convention fees include the cost of food, beverages, or entertainment. However, the convention organizer may not show these amounts separately on your bill. For each day the organizer provides food, beverages, or entertainment, subtract $50 from the total convention fee.

You can deduct this daily $50 amount as a meal and entertainment expense. However, the 50% limit applies to the daily $50 amount. For more information on the 50% limit, see Meals and Entertainment.

Food, beverages, or entertainment at a convention do not include incidental items such as coffee and doughnuts available at meetings or receptions at the convention.

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Current or capital expenses:

A current expense is one that usually recurs after a short period. For example, the cost of painting the exterior of a wooden house is a current expense.

A capital expense generally gives a lasting benefit or advantage. For example, the cost of putting vinyl siding on the exterior walls of a wooden house is a capital expense.

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Delivery, freight, and express:
You can deduct the cost of delivery, freight, and express incurred in the year that relates to your business.

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Fuel costs:
You can deduct the cost of fuel (including gasoline, diesel, and propane), motor oil, and lubricants used in your business.

The cost of a fuel related to business use of work space in your home has to be claimed as business-use-of-home expense.

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Insurance:

You can deduct all ordinary commercial insurance premiums you incur on any buildings, machinery, and equipment you use in your business.

The insurance costs related to motor vehicles have to be claimed as Motor vehicle expenses.

The insurance costs related to business use of work space in your home have to be claimed as business-use-of-home expenses. See Business-use-of-home expenses.

You cannot deduct your life insurance premiums.

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Interest:

You can deduct the interest you incur on money you borrow to run your business. However, some limits can apply.

There is a limit on the interest you can deduct on money you borrow to buy a passenger vehicle.

There is also a limit on the amount of interest you can deduct for vacant land. Usually, you can deduct interest only up to the amount of income that remains after you deduct all other expenses. You cannot use any remaining amounts of interest to create or increase a loss. Also, you cannot deduct interest from other sources of income.

You can deduct the fee you pay to reduce the interest rate on your loan. You can also deduct any penalty or bonus a financial institution charges you to pay off your loan before it is due. Treat the fee, penalty, or bonus as a Prepaid expense and deduct it over the remaining original term of your loan. For example, if the term of your loan is five years and in the third year you pay a fee to reduce your interest rate, treat this fee as a prepaid expense and deduct it over the remaining term of the loan.

You can deduct certain fees you incur when you get a loan to buy or improve your business property. These fees include:

  • application, appraisal, processing, and insurance fees
  • loan guarantee fees
  • loan brokerage and finder’s fees and
  • legal fees related to financing

You deduct these fees over a period of five years. Deduct 20% in the current year and 20% in each of the four following years. The 20% limit is reduced proportionally for fiscal periods of less than 12 months. However, if you repay the loan before the end of the five year period, you can deduct the remaining financing fees then. The number of years for which you can deduct these fees is not related to the term of your loan.

If you incur standby charges, guarantee fees, service fees, or any other similar fees, you may be able to deduct them in full for the year you incur them. To do so, they have to relate only to that year.

You may be able to deduct interest expenses for a property that you used for business purposes, even if you have stopped using the property for such purposes because you are no longer in business.

You can deduct interest you paid on a loan made against an insurance policy, as long as the insurer did not add the interest you paid to the adjusted cost base of the insurance policy. To claim the interest you paid for the year, have the insurer verify the interest before June 16 of the following year on Form T2210, Verification of Policy Loan Interest by the Insurer.

You can choose to capitalize interest on money you borrow:

  • to buy depreciable property
  • to buy a resource property
  • for exploration and development

When you choose to capitalize interest, add the interest to the cost of the property or exploration and development costs instead of deducting the interest as an expense.

The interest related to business use of work space in your home has to be claimed on line 9945 – Business-use-of-home expenses.

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Leasing costs:

You can deduct the lease payments incurred in the year for property used in your business.

If you entered a lease agreement after April 26, 1989, you can choose to treat your lease payments as combined payments of principal and interest. However, you and the person you are leasing from have to agree to treat the payments this way.

In this case, we consider that you:

  • bought the property rather than leased it and
  • borrowed an amount equal to the fair market value (FMV) of the leased property

You can deduct the interest part of the payment as an expense.

You can also claim capital cost allowance on the property.

You can make this choice as long as the property qualifies and the total FMV of all the property subject to the lease is more than $25,000. Digging equipment that you lease with an FMV of $35,000 is property that qualifies. However, office furniture and automobiles often do not qualify.

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Legal, accounting, and other fees:
Deduct the fees you incurred for external professional advice or services, including consulting fees.

You can deduct accounting and legal fees you incur to get advice and help in keeping your books and records.

You can also deduct fees you incur for preparing and filing your income tax and GST/HST returns.

You can deduct accounting or legal fees you paid to have an objection or appeal prepared against an assessment for income tax, Canada Pension Plan or Quebec Pension Plan contributions, or Employment Insurance premiums. However, the full amount of these deductible fees must first be reduced by any reimbursement of these fees that you have received. Enter the difference on line 232 of your income tax return. If you received a reimbursement in the current year for the types of fees that you deducted in a previous year, report the amount you received on line 130 of your income tax return for this year.

You cannot deduct legal and other fees you incur to buy a capital property. Instead, add these fees to the cost of the property.

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Maintenance and repairs:
You can deduct the cost of labour and materials for any minor repairs or maintenance done to property you use to earn income. However, you cannot deduct the value of your own labour.

You cannot deduct costs you incur for repairs that are capital in nature. However, you may be able to claim Capital Cost Allowance (CCA).

The maintenance and repairs related to business use of work space in your home have to be claimed as Business-use-of-home expenses.

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Management and administration fees:

You can deduct management and administration fees incurred to operate your business, including bank charges. Please do not include employees’ salaries, property taxes or rents paid.

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Meals and entertainment:

The maximum part you can claim for food, beverages, and entertainment expenses is 50% of either the amount you incur or an amount that is reasonable in the circumstances, whichever is less.

These limits also apply to the cost of your meals when you travel or go to a convention, conference, or similar event. However, special rules can affect your claim for meals in these cases.

These limits do not apply if any of the following apply:

  • Your business regularly provides food, beverages, or entertainment to customers for compensation (for example, a restaurant, hotel, or motel).
  • You bill your client or customer for the meal and entertainment costs, and you show these costs on the bill.
  • You include the amount of the meal and entertainment expenses in an employee’s income or would include them if the employee did not work at a remote or special work location. The amount is not paid or payable in respect of a conference, convention, seminar, or similar event.
  • The special work location must be at least 30 kilometres from the closest urban centre that has a population of 40,000 or more people.
  • You incur meal and entertainment expenses to provide a Christmas party or similar event, and you invite all your employees from a particular location. However, you are limited to six of these events each year.
  • You incur meal and entertainment expenses for a fund-raising event that was mainly for the benefit of a registered charity.
  • You incur meal and entertainment expenses for a fund-raising event that was mainly for the benefit of a registered charity.

The amount that you can deduct for a meal or entertainment expense for an employee varies depending on where the expense was incurred. The Meal and entertainment expenses search map can help you determine the amount you can deduct for these expenses.

Entertainment expenses include tickets and entrance fees to an entertainment or sporting event, gratuities, cover charges, and room rentals such as for hospitality suites.

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Motor vehicle expenses (automobile):

You can deduct expenses you incur to run a motor vehicle you use to earn business income on Line 9281 of Form T2124, Statement of Business Activities; or Line 9281 of Form T2032, Statement of Professional Activities.

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Office expenses:

You can deduct the cost of office expenses such as pens, pencils, paper clips, stationery and stamps.

Office expenses do not include items such as calculators, filing cabinets, chairs, and desks. These are capital items.

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Prepaid expenses:

A prepaid expense is an expense you pay for ahead of time. Under the Accrual method of accounting, claim any expense you prepay in the year or years in which you get the related benefit.

Example:

Suppose your fiscal year-end is December 31, 2006. On June 30, 2006, you prepay the rent on your business store for a full year (July 1, 2006, to June 30, 2007). You can only deduct one-half of this rent as an expense in 2006. You deduct the other half as an expense in 2007.

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Property taxes:

You can deduct property taxes you incurred for property used in your business. For example, you can deduct property taxes for the land and building where your business is situated.

The property tax related to business use of work space in your home has to be claimed as Business-use-of-home expenses.

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Rent:

You can deduct rent incurred for property used in your business. For example, you can deduct rent for the land and building where your business is situated.

The rent expense related to business use of work space in your home has to be claimed as Business-use-of-home expenses.

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Salaries, wages, and benefits:
You can deduct gross salaries you pay to employees.

Do not include:

  • salaries and wages such as “direct wage costs,” described on line 8340, or “subcontracts,” on line 8360, of Forms T2124 or T2032 or
  • salaries and drawings of the owner(s) of the business since salaries or drawings paid or payable to you or your partners are not deductible

As the employer, you can deduct:

  • your part of Canada Pension Plan or Quebec Pension Plan contributions and Employment Insurance premiums
  • Workers’ Compensation amounts payable on employees’ remuneration and any premiums you pay for an employee for a sickness, an accident, a disability, or an income insurance plan
  • provincial parental insurance plan premiums

You can deduct the salary you pay to your child, as long as you meet all these conditions:

  • you pay the salary
  • the work your child does is necessary for earning business or professional income and the salary is reasonable when you consider your child’s age, and the amount you pay is what you would pay someone else

Keep documents to support the salary you pay your child. If you pay your child by cheque, keep the cancelled cheque. If you pay cash, have the child sign a receipt.

Instead of cash, you may pay your child with a product from your business. When you do this, claim the value of the product as an expense and add to your gross sales an amount equal to the value of the product. Your child has to include the value of the product in his or her income.

You can also deduct the salary you pay to your spouse or common-law partner. When you pay your spouse or common-law partner a salary, use the same rules that apply to paying your child.

Report the salaries you pay to your children and spouse or common-law partner on T4 slips, the same as you would for other employees. However, you cannot claim as an expense the value of board and lodging you give to your dependent children and spouse or common-law partner.

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Supplies:

You can deduct the cost of items consumed indirectly to provide the business’ goods or services.

For example, the drugs and medication used in a veterinary operation, or scripts required for an actor to portray a role.

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Telephone and utilities:

You can deduct expenses for telephone and utilities, such as gas, oil, electricity, and water, if you incurred the expenses to earn income.

The expenses for utilities that are related to business use of work space in your home have to be claimed as Business-use-of-home expenses.

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Travel:

You can deduct travel expenses you incur to earn business and professional income. Travel expenses include:

  • public transportation fares
  • hotel accommodations
  • meals

In most cases, the 50% limit applies to the cost of meals, beverages, and entertainment when you travel.

The 50% limit also applies to the cost of food and beverages served and entertainment enjoyed when you travel on an airplane, train, or bus, when the ticket price does not include such amounts.

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The above information provided by Canada Revenue Agency.