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What expenses can be written off as business expenses?

Expert: Michael Fromstein

Mark asked:

I am about to start a small business and am curious about claiming expenses. I understand that as a small business owner (either an incorporated business, a partnership, or a sole proprietor), one can claim professional development expenses. However, where does the government draw the line of what one can, and cannot, claim?

For instance, I find a program at a university in the evening that will allow me to take a few courses in business administration that will lead to a diploma, I could argue that this would definitely help me grow my company and business, especially when advertising my credentials.

However, can I take courses at a university and later claim them as a business expense? There seems to be a lot of discrepancy and "gray area" when trying to discuss this, and few seem to know the exact answer?

Is this because each individual situation is determined on a case-by-case basis? Or can one simply not claim "professional development" as a business expense?

As courses and school can be incredibly expensive, I thought this would be a good question to ask before I start spending money on something so fundamentally important to growing a business.

Michael Fromstein answered:

As a general rule, expenses that you can directly tie to running a business are deductible in computing the income from that business, or can create a tax loss from a new business.

Some types of expenditures are subject to special rules:

  • Expenses for a home office required for a business cannot create a loss, they must be carried forward to reduce future income from that business;
  • Only 50% of legitimate entertainment and promotion expenses can be deducted;
  • NO expenses for golf games or club memberships can be deducted.

University courses usually come with a tuition credit and can be used to reduce taxes payable without claiming them as a business expense. An individual taking a course that is not from an accredited post-secondary school might benefit from business knowledge. The cost of such courses would be a legitimate business expense.

The nature of Canadian income tax is that it is based on reasonableness. If you claim a reasonable amount for an entertainment expense, it would be allowed. If you claimed an unreasonably large amount for that same entertainment expense, it would likely be successfully challenged by Canada Revenue Agency (CRA), or the courts if you did not agree with them.

Some areas in tax law are black and white, for example, no matter how many contracts you close on your yacht or the golf course, you can't deduct the related expenses.

A taxpayer though did get to claim costs on a retrofitted tug boat since that was not a yacht. Most questions in tax law come up in areas that are not black and not white. There are no questions about the amount you can deduct for an RRSP contribution, the rules are explicit.

There are rules that if you pay too much for something, you can't deduct the excess if there is reason to believe there were other considerations (e.g. you paid a family member too much for salary) and rules that let CRA and the tax courts reallocate your costs between different things if they think the allocation was unreasonable.

Because of that scope, most of the questions that come, cannot be given black or white answers. As a general rule, often, if it sounds too good to be true, it is not true.

Also, there are scores of tax cases every day between taxpayers and CRA where the CRA believes taxpayers are trying to push the envelope too far. CRA's track record of winning is far from stellar, and when they lose, and sometimes when they win, it moves the lines of where the envelope ends. In the non-black and white area, the envelope is regularly moving.

About the author

Michael Fromstein is a tax specialist with Integrated Professional Specialist Services.

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