It’s important to claim all possible business expenses in order to minimize your taxes owing. Depending on your situation, the business expense tax deduction will be somewhat different.
If you are self-employed and work from home, you can claim business use of home expenses. However, if you have a business with an office, you can only expense costs for the office, not for working from your house.
The Canada Revenue Agency has detailed rules on what CRA business expenses are eligible. Read on for details.
What is a business expense?
Basically, any expense that is used to earn an income can be claimed. This includes advertising, office supplies, telephone and travel to meet with customers or to go to trade shows.
Can you write off car insurance as a business expense?
The CRA has detailed rules about expensing car costs, including insurance, gas and maintenance. You are only allowed to claim the portion of your vehicle cost that is directly related to earning an income. Be sure to keep receipts for your vehicle costs.
You must keep a detailed log of your business travel. This includes the number of kilometres traveled (with starting and ending odometer readings), the date, and the purpose of the business trip. At the end of the year, you add up the business kilometres and the personal kilometres. You then calculate the percentage of the total that was used for business purposes.
For example, suppose you drove 5,000 km for business and 5,000 km for personal. You could then claim 50 percent of your total vehicle expenses for the year.
Can you claim a cell phone as a business expense?
This is treated in a similar way to a vehicle. If you are self-employed and use your phone for both personal and business reasons, you can expense the business portion.
If you have an incorporated business and use your phone entirely for company purposes, you can claim the entire monthly cell phone bill as an expense.
When you purchase a cell phone, you may not be able to write off the entire amount the first year. You may have to amortize the cost over several years.
How to calculate business use of home expenses
If you run your business out of your home, you may be able to claim a portion of your household expenses, including utilities, insurance and internet.
You need to dedicate a specific room to your office and then calculate the square footage of that office in comparison to the size of the rest of your home.
If you are an employee and required by your employment contract to have a home office and pay for related expenses, you can claim an expense if you use your workspace at least half the time for work.
During the pandemic, the CRA has been offering breaks to people who have been forced to work at home. If you fall into this category, be sure to check the CRA website for details.
Can a massage be a business expense?
A massage cannot be directly claimed as a business expense because it does not help to earn income. However, your company can establish a Health Care Spending Account for employees that allows them to access services such as physiotherapy and massage. The HCSA offers a tax-deductible benefit for the business. And the benefits are received tax-free for the employees. For information on claiming travel medical expenses, check out our guide.
Can I claim restaurant meals as a business expense?
Yes and no. If you go out for a meal during your lunch hour, you can’t claim this as a business expense because it was not used to generate income. Like the expense of commuting to the office, lunches just come out of your own pocket.
However, if you are meeting with a client(s) over a meal or traveling for business, you can claim 50 percent of food and beverage costs. Be sure to keep receipts and maintain a record of the clients you entertained and the purpose of the meeting.
Can I claim business expenses without income in Canada?
Generally, no. The CRA expects that any business will generate income and have a reasonable expectation of profit. So you can’t take a hobby that you pour money into and claim business losses if you don’t have any sales.
Having said that, you can claim business expenses if you are earning some income. For example, suppose you enjoy making art in your spare time. You have a website and are generating some sales. In this case, you can claim legitimate business expenses such as the cost of art supplies and maintenance on the website. Many businesses operate at a loss for the first year so you won’t draw the attention of CRA initially. However, ongoing losses will be a red flag and the CRA may rule that this is not a legitimate business.
If your business is incorporated, you cannot write off business losses against other income, such as salaries from employment.
Are charitable donations a business expense?
This depends on your situation. If you are self-employed or run an unincorporated small business, you can claim a donation on your personal tax return.
Incorporated business owners can donate personally or via the corporation. You should analyze which option will deliver the best tax advantages. Note that corporate donations are limited to a maximum of 75 percent of the net income of the company.
Donation tax credits vary by province so check the rules in your jurisdiction.
Be reasonable with tax deductible business expenses
Nobody wants to be audited by the CRA. Therefore, be cautious about business expense tax deductions. The most common red flags for the CRA are exorbitant claims for vehicle expenses, meals and entertainment, and home office costs.
