Published April 2011
A Guide to Expense Deductions in Your Canadian Business
As Canadians hunker down and file their personal income tax returns this month, it's a great time for business owners to review the expenses they're entitled to deduct from their business income.
Many expenses—such as office supplies, parking fees and delivery charges—are 100 percent deductible. Others, such as furniture and computers, are capital expenses and must be depreciated over a period of several years.
But there are also a few deductions that are not so straightforward. Below, we've highlighted some key ones and their corresponding line on Canada Revenue Agency's Statement of Business or Professional Activities (Form T2125):
Advertising (Line 8521)
When it comes to advertising expenses, not all media are treated equally.
Advertising in Canadian newspapers and on Canadian television and radio stations is simple. Deduct 100 per cent of your advertising expenses, including any finder's fees. For print periodicals and magazines directed at a Canadian market, you will need to count the content first.
If the publication contains at least 80 per cent original editorial content, you can deduct the full cost of your advertisement. If does not, you can only deduct is 50 per cent.
Ads placed in international publications that are targeted at a non-Canadian audience are deductible. However, ads placed with foreign broadcasters that are directed mainly to a Canadian market cannot be deducted.
Meals and entertainment (Line 8523)
Go ahead and claim for those baseball tickets, client lunches and gratuities — as long as they have a legitimate business purpose. Just remember that you cannot expense the full amount: The maximum amount you can claim for food, beverages and entertainment is 50 per cent of either the amount you paid or "an amount that is reasonable in the circumstances, whichever is less," says the Canada Revenue Agency.
There are, however, a number of notable exceptions to this rule.
- Staff parties: You can deduct 100 per cent of meal and entertainment expenses when you host a party or similar event to which you have invited all employees from a particular location, but you are limited to just six of these events each year.
- Fundraising events: Your meal and entertainment expenses at a fundraising event held primarily for the benefit of a charity.
- Client billings: If you bill your clients in full for meals and entertainment expenses and you show these costs on your bill, you can deduct the full amount.
- Truck drivers: Long-haul truck drivers can claim 75 per cent of expenses for food and beverages they consume during an eligible travel period (this rises to 80 per cent after the 2010 taxation year). An eligible travel period is based on both time and distance. It occurs when the driver is away from the area in which he or she lives for at least 24 continuous hours and is driving a long-haul truck that carries goods to a location that is at least 160 kilometres from his or her residential location.
- Foot, bike couriers and rickshaw drivers: Due to the extra food and beverages they must consume, self-employed foot and bicycle couriers and rickshaw drivers can claim a flat rate of $17.50 for each day (8 hours) worked. These individuals will not need to collect receipts, but instead must keep a log book showing a record of the days worked and the hours worked on each of these days. (CRA may also request additional documentation to support their claims, such as dispatch slips.) Those who want to claim more than the flat-rate amount will need to keep all their receipts and be able to show that the extra costs were a direct result of their work.
There are a few other less common exceptions as well, such as meals provided to employees working at a remote location or construction site or where the employer has included the meal and entertainment amount in an employee's income. To learn more about these exemptions, see Meals and entertainment.
Travel (Line 9200)
You can legitimately deduct the cost of hotel accommodation and public transportation fares when you travel to earn business or professional income.
Of course, when you travel you will also likely spend money on food and entertainment, which means that the 50 per cent deduction limit will apply in most cases.
Interestingly, it matters whether or not your travel ticket includes these items. If it does, you do not have worry about separating out your meal and entertainment costs and applying the 50 per cent limit. If you buy these things separately, however, the 50 per cent is in accordance with the rules and exceptions noted above.
Convention expenses (Line 9270 – falls under "Other Expenses")
There are a few things to consider before you expense a convention.
For starters, there is a limit: Each year, you can deduct the cost of only two conventions that relate to your business or professional activity.
You also need to consider the location. The conference generally needs to be held in the same area that the organizer conducts its business, which unfortunately makes it difficult for your local Chamber of Commerce to hold a convention in the Bahamas which its members can then expense.
There are also some tricky rules about deductions for meals and entertainment.
As previously mentioned, you can claim up to 50 per cent of meals, beverages and entertainment when travelling. You will also need to check your convention ticket carefully.
If the organizer includes incidentals like coffee and cookies at meetings and receptions, don't fret. However, for each day the organizer provides food, beverages or entertainment, you must subtract $50 from the total convention fee for that day. That amount is then used as a meal and entertainment expense and the usual 50 per cent limit applies.
Business-Use-of-Home Expenses (Line 9945)
For businesses that are not home-based, expenses like heating, electricity and insurance are normally expensed at 100 per cent. However, home-based businesses can only claim the portion of these expenses related to their business use within the home.
You must meet one of two criteria to deduct business-use-of-home expenses. Your home must either be:
- your company's principal place of business; OR
- used on a regular basis as a place where you meet clients, customers or patients and the space must also be dedicated for use by the business only.
Valid business-use-of-home expenses include part of your:
- maintenance costs (heating, electricity, insurance and cleaning supplies);
- property taxes; and
- mortgage interest.
Before you claim any capital costs, it is advisable to consult an accountant who specializes in tax issues, as the deductions you claim could impact your capital gains allowance later on should you sell your home.
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