Claiming Business Expenses in Canada

As a taxpayer in Canada, you would want to know how you can minimize your tax obligations to their fullest. By claiming business expenses during filing, you can reduce your tax deductions by quite a bit. 

The Canada Revenue Agency (CRA) defines business expenses as costs that are reasonable for certain types of businesses, incurred to earn income. These expenses can be deducted for tax purposes, and any expenses that are not related to the business are not tax-deductible.

Given this definition, you would need to be able to distinguish between your business expenses and your personal expenses throughout the year. It is a good idea to keep a separate bank account for your business to help you keep track.

Claiming Your Business Expenses

When thinking of claiming your business expenses, you would have to bear some caveats in mind.

‘Reasonable’ Expenses

The word ‘reasonable’ in the definition provided by the CRA means that expenses could vary from business to business. For example, an interior decoration company could consider lunch with clients as a business expense, while it may not seem appropriate for a painter. As such, whether or not the expense is deemed reasonable depends on the nature of the business.

The amount being claimed as an expense is also a factor of judgment – it must fall within the CRA’s expectations; otherwise, it could raise red flags and possibly result in an audit. For example, if a business lunch was expensed at $1,000, it would certainly fall outside of the boundary of a reasonable expense and might even raise suspicions. 

When unsure of whether or not an expense you want to claim for deductions is a reasonable one, you would want to get the opinion of an accountant who would be able to gauge this better. Getting an accountant to do your taxes for your business is also a deduction since it is an expense that is relevant to your business operations. 

Fraction of Expenses

You cannot deduct all your business expenses. You can only deduct the fraction of the expense that is directly relevant to your business operations. For example, if you have a vehicle that you use for your business but is also used for personal purposes, you can only claim the portion of your vehicle expenses that you are applying for your business. 

Similarly, when working from home, you would use your phone to conduct business. However, you will also use your phone for personal reasons. Therefore, you cannot claim the entirety of your phone bill as a deductible. Only the portion that covers your business use can be claimed.

Documentation

All business expense claims must be backed by documentation for them to be considered. The exception to this is meal and vehicle expenses, which are only valid in some circumstances. With these exceptions, instead of keeping track of each part of the expense (for example, fuel and insurance for vehicles), there is a simplified rate where meals are claimed at a flat rate and vehicles are claimed at a per-kilometer rate. If you are not providing receipts and documentation for expenses that you want to be claimed, you may end up being audited.

For expenses that are incurred by employees, there is a form to fill out, which details the nature of the expense, whether it was reimbursed, and whether or not it is deductible. The employer reviews this form to ensure that all the expenses are valid and are relevant to employment.

Forms are also needed to list taxable expenses that the employer pays for the employee, and these include salary and benefits. However, some expenses that are paid by the employer become taxable to the employee involved, such as phones and car allowances. 

Common Business Expenses

The CRA provides a business expense index for owners to see which expenses can be claimed and the rules for deductions that are relevant to each of these. The amount that you can deduct within any given year is also dependent on whether it is the current year’s expense or a capital expense. 

Also, to be eligible for tax deductions on your business expenses, your business itself must also have a reasonable expectation of profit. Note the word ‘reasonable’ in this definition; what is deemed reasonable varies from business to business. 

Usually, business expenses that can be claimed include accounting and legal fees, advertising expenses, vehicle expenses, bad debts under the condition that these bad debts were expected, bank charges, etc. 

Capital property expenses can also be claimed. Usually, purchases, such as vehicles, equipment, or property, benefit the business for a substantial amount of time. However, you cannot claim the full expense within the year it occurs; instead, you claim a fraction of the cost during the life of the item you purchased. This is a Capital Cost Allowance, which has a list of classes under the CRA, and each class specifies a yearly depreciation amount and a list of the purchases that fit within it.

Can Taxes Be Considered Business Expenses?

In some cases, taxes can also be considered business expenses. For example, if you paid taxes on an expense that was part of your business operations, such as paying the GST on an item that pertains to your business, you can claim an input tax credit on this, and have it deducted. 

Similarly, if home-based business owners are paying property tax on their house, which they also use for their business, they can claim some portion of those taxes as an expense. 

When claiming business expenses in Canada, however, you should keep in mind that any grants or assistance you received should be subtracted from the expenses they applied to before you can put the claim forward. You can also see a full list of business expenses you can claim here.

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