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Can you claim expenses for equipment purchased before starting your business?

By Julie King |

Pierre asked:

I have a question, I'm going to eventually (next 2 month) open a business and i wanted to know if i buy equipment now (cause it's on sale) can i put those buying on expense?

Can i go back like 6 month back (if i have the receipt) to put those thing on expense?

Julie King answered:

First of all, congratulations on your plans to start a business!

You've asked a good question, but there are some other things you may want to consider as well.

First, to answer your actual question, there are ways to roll assets that you have purchased personally into the new business if they will be used by the company. A laptop or desk would be a perfect example of this.

The process can be a bit complicated if you are incorporating the company; if you are going to operate as a sole proprietor it is straight forward as long as you keep the necessary receipts.

You will want to get an accountant or skilled bookkeeper to help you do this properly and also to help you get your business set-up correctly with a decent bookkeeping software package. (Simply Accounting and Quickbooks are the two most popular choices in Canada, and a new online web app, is an emerging option that offers a free bookkeeping system.)

However, there are two other things that are important to know.

First, there is a tax difference between "expenses" and "capital costs". Expenses are things that are consumed within a year like office supplies, rent and utilities, and these you can write-off directly as an expense in your books.

If something you purchase will be used for more than a year, such as a desk, printer or vehicle, it is consider an asset. It sounds like the equipment you are purchasing will fall into this category.

With assets you do not expense the full cost when you spend the money, but instead you deduct a part of the purchase cost each year as the asset decreases in value. (That's called a capital cost allowance and the government has specific formulas for how each class of assets can be reduced in value.) You'll probably have heard of people talk about depreciation - depreciation is the amount of each asset's value that you can claim as an expense each year.

This is also why some companies choose to lease equipment, as leases are treated differently on your books, with the company being able to expense lease payments as they are made. (Note that there are changes pending to the handling of leases for public companies).

Secondly, if you are making a major purchasing and will be registering to collect GST/HST (or the PST and the assets you are buying would qualify for a PST exemption), you may want to hold off on your purchase until you have everything in place to get the tax back, which could end up being a larger savings than the discounted sale price.

It is possible that this can be done quite quickly, so that you can take advantage of the sale price. However, I would also strongly recommend that you don't rush things and find it is more costly in the long run to fix something (like choosing the wrong business structure).

I spoke with a representative at Canada Revenue Agency who explained that there is still a way you could get back the HST/GST if you plan to incorporate the company, although it's complicated. Here is one possible solution:

  • Purchase the equipment now personally, before you incorporate. Keep your receipts.
  • When you incorporate, you will roll the assets you purchase into the business (you will need an accountant or laywer to help you file this correctly).
  • When you do this, make sure the value of the assets is the purchase price plus tax, so that you personally are reimbursed for the tax.
  • The business will need to pay tax again on the equipment, but if it is registered for HST/GST it will be able to claim that amount back as an input tax credit.

In your situation, the questions I would ask are:

  1. Should I consider leasing the equipment, which would enable to write off the payments as a monthly lease expense and also reduce the impact on my cashflow? (Interest costs on leasing is higher and you also need to be able to qualify for lease financing.)
  2. Do I need to register for HST/GST/PST immediately and if I do, should I do this early so I can claim back the tax paid or take advantage of a PST exemption for qualifying goods? (Be careful about using the PST exemption incorrectly, as this could cost you later.)
  3. Are there other reasons I should consider voluntarily registering for the HST/GST even if I don't have to by law?
  4. How do savings from the sale price of the asset compare to the potential tax savings from HST/GST input tax credits?
  5. Will I run a sole proprietorship (in which case registering early for the HST/GST is possible, as you as the sole propietor are the business and each person only has one Business Number / HST/GST account, even if they register multiple sole proprietorship businesses).

Our Starting a Business Guide provides information on a number of things you'll need to consider. Also, many communities have business resource centres that have offer free or low-cost seminars and sometimes free consulting as well.             

Canada Revenue Agency (CRA) also has these two documents that will help you understand voluntary registration (where you register before you reach the $30,000 minimum):

These two articles on CanadaOne that can help you understand issues around HST/GST and some unusual expense considerations:
Demystifying the HST/GST
A Guide to Expense Deductions in Your Canadian Business

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