Call Us: 905 268 0150 - Mail: amadan@madanca.com

Tax Write-Offs for a Small Business in Canada

What are the tax write-offs for a small business owners in Canada?

If you are a small business owner in Canada, you may want to know which tax deductions will save my business money. Tax write-offs for a small business in Canada will significantly reduce your business’ taxable income and taxes payable.

1.) Home-Office Expenses – Tax Write-offs for a Small Business in Canada

The most common deduction or tax write-off for a small business owner in Canada is home-office expenses.

Tax Write-Offs for a Small Business

If you work inside your house you will be eligible for tax write-offs on certain office related expenses.

Home-office expenses include:

-Mortgage interest on your residence
-Utilities
-Property taxes
-Repairs & maintenance
-Home insurance

You cannot write-off 100% of those expenses, but you can deduct a reasonable portion.

For example, if you have a home-office (such as a den, a basement, or a confined space that you use exclusively for your work), then the percentage of your home office expenses that you can deduct is equal to the percentage that your home-office space is of the total size of your home. It is important to note that you cannot claim a dual purpose room such as your bedroom. The space you claim can only be used for the purpose of business activities.

Example: Vivian is a lawyer and works out of her house. She estimates that 300 square feet out of her 3,000 square foot house is allocated to office space. This means Vivian can deduct 10% of her home office expenses. If she were to incur $5000 of home office expenses (as listed above) during the year she would be able to claim $500 ($5,000 x 10%) on line 9945 of T1 tax form

It is important that your house does not take up too much square footage, or you may not be able to claim the principal residence exemption. The CRA is also considering a mandatory submission of a floor plan to make sure your square footage estimates are accurately portrayed.

Note that home office expenses can be deducted by either a self employed individual or a corporation. Here are 8 home-office tax write-offs.

Before deducting home office expenses, you should consult with an accountant in Toronto.

2.) Car Expenses – Tax Write-offs for a Small Business in Canada – Accountant Toronto

Car expenses are a major tax break given to small business owners operating in Canada. Car expenses include:

- Capital cost allowance (if you own)
- Fuel & oil
- Insurance
- Lease payments (if you lease)
- Parking
- Repairs & maintenance
- Toll charges
- Vehicle registration fees

You cannot expense 100% of your car costs, but you can deduct the business portion. For example, if you drove 20,000 kilometers in the year, and 50% of those kilometers were for business purposes, then you can deduct 50% of your car expenses.

In addition, if you own your vehicle then you can write off 30% of the cost of your vehicle each year, which is referred to as Capital Cost Allowance. The following example illustrates a person who purchases a vehicle for $25,000 and the CCA that would be deducted in that year.

Tax Write-offs for a Small Business

Amortization table you can expect to fill out on your business tax return. Showing the purchase of a car in the current year.

Any time you purchase a car for business, an amortization table like the one above will need to be filled out on your T2125 Statement of Business Activities return. In the first year of purchase the CRA allows you to take a half year off the depreciation. It does not matter if you purchased the asset January 1 or December 31, only half is depreciable.

In order to verify that the car is in fact being used for business, the CRA requires that an accurate log book be maintained. There are many apps available through Google Play or the App store which can keep track of your business mileage. Things you should include in your log book are:

- The destination
- Reason for trip
- Distanced covered(Km)

When purchasing your next car, you should consult with an accountant, to determine the tax write-offs for a small business in Canada.

3.) Capital Assets – Tax Write-offs for a Small Business in Canada

Tax depreciation (i.e. capital cost allowance) is a big tax deduction for a business. A capital asset is something of tangible value, which will last a long period of time (usually more than 1 year). Capital assets include furniture and fixtures, equipment, computers, etc. These assets cannot be written off in a single year. Instead, capital assets are written-off over a period of time based on the Canada Revenue Agency’s specified depreciation rates, which are as follows:

Tax Write-offs for a Small Business

Computers costs can be deducted at a CCA rate of 55% each year.

- Building – 4% per year
- Furniture & fixtures – 20% per year
- Software – 55% per year
- Computers and computer equipment (e.g. scanner, printer, hard drive, monitor, etc.) – 55%
- Vehicles (car) – 30% per year (see Should I lease or buy a car?

Computers include laptops, desktops, notebooks, hardware and computer related equipment, such as scanners, printers and faxes. Computers and computer related equipment can be written-off entirely in a single year, as long as the purchase was made from January 27, 2009 to February 2011. After February 2011, the depreciation rate for computers is 55% per year.

Tip: Make capital purchases right before year end so you can take advantage of depreciation deductions on purchased assets. In the first year only half of the CCA can be claimed.

4.) Insurance

Insurance is an important part of any successful business. The Canadian Revenue agency also agrees with this assessment and offers policy owners deductions on their tax returns. In this section you will learn which types of insurances  qualify as tax write-offs for a small business owner.

a.) General Business Liability Insurance

A common insurance many businesses should invest in is general liability insurance. This type of insurance protects your business from:

- Injuries to customers, employees, vendors or visitors that occur on your premises.
- Injuries that occur elsewhere as a result of the actions or negligence of an employee
- Third party property damage caused by an employee

Not only does this protect your business from potential lawsuits associated to injuries, it is also fully deductible on your personal return. The premiums paid each month to your insurance company can be claimed on line 8690 of your T2125 Statement of Business Activities form.

b.) Business Property Insurance:

Another important form of insurance your business might want to invest in is property Insurance. Unfortunately general liability insurance does not protect your assets in case of damages. Property insurance will cover all business assets including building and equipment in case of destruction. If your business is run out of your home you will still need to invest in this insurance even if you have home insurance as it does not cover the business portion. Property insurance premiums can be written off for small business owners through your personal tax return.

c.) Business Interruption Insurance

This form of insurance is not sold as a separate policy. It is an add-on to property Insurance and would be a wise investment for a small business. In the event of a natural disaster or fire business interruption insurance will cover you for all earned income expected during the duration your business is closed. Premiums paid for this insurance can be a write off for small businesses on their tax return included in the insurance section.

d.) Life Insurance

Life insurance policies or any other personal policies an individual may posses, cannot be claimed as a business deduction. In order for you to be able to claim an insurance policy as a deduction it must be related to your business. There is one circumstance if your life insurance policy is used as collateral for a business loan, you may be able to claim a portion of the premium paid. For more information on eligible insurance deductions check out the CRA’s bulletin on Line 8690 – Insurance

5.) Meals and Entertainment

Tax Write-offs for a Small Business

If you entertain clients for business purpose you can deduct 50% of the cost.

When you entertain clients for the purpose to earn business income it will be tax deductible. This means if you take a client out for dinner or enjoy a live leafs game, 50% of the cost can be deducted from your business income. If you cannot provide a receipt a reasonable amount can be deducted, which CRA states is 50% of $17 per meal or a maximum of $51 per day.

There are certain circumstances where you can deduct 100% cost of meals or entertainment. The following are some examples:

- For a staff or holiday party (allowed 6 per year)
- When meals are provided for a fundraiser where the primary purpose is to benefit a registered charity
- When meals and entertainment are provided as compensation to customers (restaurant or hotel)

Unfortunately golf fees are not tax deductible on your return.

A common practice of business especially in North America is entertaining potential business clients with a round of golf. Unfortunately golf fees are not tax deductible even when entertaining clients.

6.) Accounting and Legal fees

Another two tax write-offs for a small business owner in Canada are accounting and legal fees.

Accounting Fees

If your business requires an accountant to prepare your tax return, you can fully deduct the tax return preparation & accounting fees from your business income.

Legal Fees

If you seek the advice of a lawyer related to a potential lawsuit or other circumstances related to your business, then the legal fees incurred are fully deductible.

If a lawyer is used to purchase a capital asset such as a building or equipment, the legal fees incurred cannot be deducted from your business income. The legal fees are instead added to cost of the capital asset purchased.

7.) Business Expenses – Tax Write-offs for a Small Business in Canada

 

Tax Write-offs for a Small Business

As a small business owner there are many tax write-offs for a small business owner that the government makes available to help you continue to grow.

Most business expenses incurred by small businesses in Canada are tax deductible

The Canadian Income Tax Act states, any expense incurred for the purpose of earning income from business, as long as that expense is reasonable, is tax deductible. In other words, business related expenses that you incur (as long as they’re reasonable) are tax deductible.

What are some of the common types of business costs that a small company can expense? They include:

- Accounting and tax preparation costs
- Advertising
- Capital cost allowance (e.g. on equipment purchases and car)
- Home office expenses
- Internet
- Inventory purchases (see Claim a reserve for obsolete, damaged or unusable inventory
- Lease payments (e.g. computer lease, equipment lease, car lease, etc.)
- Legal fees
- Meals & entertainments (50% only)
- Rent
- Salary and wages
- Sub-contractors
- Supplies
- Telephone
- Tools
- Website charges
- Other business related purchases

Speak with an accountant to find out if you’re missing any tax-write offs for your company.

About the Author : Allan Madan

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation.
Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

If you like this article, kindly +1 and follow Allan Madan on by clicking on these
two buttons.

 

This entry was posted in Corporate and business tax and tagged , , , , , . Bookmark the permalink.

About the author

is a Chartered Accountant, CPA and Tax Expert and enjoys working with business owners, individuals and entrepreneurs.

46 Responses to Tax Write-Offs for a Small Business in Canada

  1. I think this site has got some real superb information for everyone : D.

  2. Many thanks from Gilford ;)

  3. TB says:

    If I purchased a new computer for my proprietorship in December 2012, how much of it should I write off for the 2012 calendar year if any? What is the maximum? Thank you.

    • superAmin says:

      Hi TB,

      Computers are generally depreciated at a rate of 55% (Class 50).

      Hope you find this helpful and thank you for your question.

      Allan and his team

  4. Janice miles says:

    Hi Allan I just incorporated my small business this year and had a questions to ask you. I want to pay my self a salary but with the least tax implications. Can I just withdraw my salary from the company or is there a better way to pay myself?

    Thanks

    Janice

    • superAmin says:

      Hi Janice,

      Each option has advantages and drawbacks. It is important to evaluate your particular financial goals before knowing which option is more favorable. The biggest advantage of paying a salary (and bonuses) is that you can deduct this as a business expense, reducing your corporation’s taxable income. However, paying a salary will require your corporation to remit payroll taxes and prepare the necessary tax slips, which can be complicated if you don’t have prior experience.

      The biggest advantage of paying dividends from your business’s perspective is the relative simplicity when compared to paying salary. You are not required to make CPP payments and it’s as simple as writing yourself a cheque and updating some corporate documents (i.e.: minute book). However, dividends are not deductible as a business expense.

      From a personal perspective, dividends are taxed at a lower rate than salary. However, dividends do not increase your RRSP contribution room, which will prevent you from contributing to your RRSP.

  5. Jenny says:

    I uses my car for my own business. So what you are telling me is I put on 60,000 km for business last year of which 40,000 was for business. I can therefore deduct 66.67% of my cars expenses?

  6. Travis says:

    I was wondering If I could carry forward my business home expense forward into the future? If so how long do I have to uses this deduction?

    • superAmin says:

      Hello Travis,

      Yes you can carry forward your home office expense. There is no restriction on how many years it can be carry forward.

      Team Allan

  7. Amir says:

    I was wondering if I can deduct my 407 expenses as part of the motor vehicle deduction?

    • superAmin says:

      Hi Amir,

      If you are self employed yes you can deduct them. If you are reimbursed by your boss or company you work for, then no you cannot claim it as a car expense.

      Thanks

      Allan

  8. Jordie says:

    Hello,

    I recently purchased a building and required a lawyer to finalize the transaction. It says legal fees are tax deductible, Does this mean I can deduct them on my company’s tax return this year?

    Thanks

    Jordie

    • superAmin says:

      Hi Jordie,

      Unfortunately legal fees associated with purchasing assets such as a building are not allowed to be deducted. They are included in the business purchase price.

      Hope this helps

      Allan

  9. Shelly says:

    Hi Allan,

    I was wondering, can i still claim expenses such as taking clients out to dinner if I no longer have the receipt?

    Thanks

    • superAmin says:

      Hi Shelly,

      Unfortunately you cannot claim theses expenses. The CRA requires supporting documents when you submit an expense. You can claim these expenses but you do so at your own risk. If the CRA asks to audit your books you will be required to show supporting documentation. IF caught you can be subject to fines and possible legal action.

      Thanks

      Allan

  10. Josh says:

    I am a small business owner but I have a question about RRSPs. I have recently started saving through an RRSP and I am not seeing the results I want. I was wondering what type of Investments should I be holding in my plan?

    Thanks

    • superAmin says:

      Hi Josh,

      For your RRSP you will want to follow the same strategies as any portfolio manager will tell you. You will want to have a balance mix of safety, income and growth. To achieve this you may want to invest in mutual funds that have close to a 50/50 split between bonds and stocks. You should also invest in GICs as well as ETFS to reduce your overall risk. These of course will all remain inside the RRSP accumulating interest over time and rewarding you upon retirement. If you are looking for a more profitable retirement plan you may want to look into Individual pension plans and if your company offers them.

      Regards

      Allan

      • Josh says:

        Hi Allan what exactly is an Individual Pension Plan and how can it help me generate more money for my retirement savings.

        • superAmin says:

          An IPP is a defined-benefit pension plan that is registered with the provincial government as well as the CRA. Defined-benefit pension plans will provide the investor with a specified monthly benefit. This will be distributed to you upon retirement. The amount is predetermined by a formula based on factors which include your income and how many years you have worked. The reason why they produce higher returns is you contribute a greater amount than an RRSP and the plan is usually operated by an actuary who specializes in getting the greatest return when investing. For more information check out tip 6 on how to save tax for the self employed in Canada article.

          Thanks

          Allan Madan

  11. Trinity says:

    I own my own business. I recently went to Chicago to try and enlist a potential client to add to my business. I know certain travel expenses are deductible on my business income tax. I am not incorporated. Please let me know if the travel costs (airfare, hotel) and any meals and entertainment costs I incurred are covered.

    Thanks

    Trinity

  12. Trang says:

    Hi Allan,

    Just started on my own business. My question has to do with business assets that have gone down in value. Can I claim Capital Cost Allowance on items I once used for myself if I’m now using them for my business?

    • amadan says:

      Hello,

      When you start using items for your business that you once used for your own personal use, there is a deemed change in the use of the asset. Therefore, the CRA treats the situation as if the “personal you” has sold the asset to the “business you”. The value you attribute to the asset is its fair market value, not what it originally cost you. Let’s say you bought a computer, and it cost you $4,000. Now that it is used, however, it is worth $1,500. Its current value of $1,500 is what you would put on your form T2125 under CCA class 50. The difference between these two numbers is not deductible, because that was the time you were using the computer for yourself.

      Regards,
      Allan Madan and Team

  13. Sora says:

    Hi Allan, I bought accounting software for my business last year. Is this eligible for deduction? If so, at what rate can I deduct it at?

    • amadan says:

      Hello,

      Computer software that you purchase (that is not the operating system) is eligible to be written off evenly over a two year period. Software is included in class 12, and is subject to the half year rule. If you bought accounting software for $500, then you would write off $250 in the year of purchase and the remainder in the subsequent year. When buying computer and software together, remove the price of the software from the overall calculation. It is important that you not include the whole purchase price as computer equipment because it is deductible at a lower rate than software.

      Regards,
      Allan Madan and Team

  14. Neno Puck says:

    Hi.

    I am starting a business using home equity line of credit (HELOC) money. I already know I can deduct the interest expense, but my question is this. If my business makes $10k in its first year, can I apply that towards my mortgage instead of my HELOC? If so, how long can I do this for? Can I write off the full HELOC expense even if my business makes money?

    • superAmin says:

      Hi Neno.

      The profit from your business is considered “after-tax money”. Therefore, you can do what you want with it. The direct use rule states that interest (where the principal amount of debt is incurred to generate property or business income) is fully deductible against the respective income. You do not have to pay your home equity line of credit, but do make sure you are current with your required HELOC payments.

      If you took out the home equity to try and make taxable money, then you can deduct it. However, you cannot take out the HELOC and use the money for personal use and take a deduction for interest paid. Keep a paper trail to show how you used the borrowed funds.

      Regards,
      Allan Madan and Team

  15. henryc says:

    Hello.

    I am a salaried employee, and I work in sales. My company gives me a monthly car allowance, which is taxed and appears on my bi-weekly paycheques every month. Each year, I deduct car expenses (car washes, oil changes, etc.) at a ratio of roughly 55% work and 45% person use. This ratio varies from year to year, but it does stay consistent.

    This year, I bought a set of snow tires for $1800. I also upgraded the stereo system, which cost me $3500. Should I add the tires and stereo to my tax return?

    • superAmin says:

      Hello Henry,

      You can claim the tires, but the main issue is with the stereo. A stereo is not included in the regular maintenance. If you were self-employed, you could add it as a class of depreciable property. This much more difficult as a salaried employee. Ultimately, you could claim the stereo as an addition to your vehicle’s CCA or an outright repair expense. If you claim it as an outright expense, you run the risk of being reviewed or audited by the CRA. You have to prove that the stereo is required for you to conduct your business and operate your vehicle.
      In addition, you can only depreciate up to $30,000 pre-HST/GST on new passenger vehicles. If your original purchase price was above that, this will not work. If you need any more advice, please do not hesitate to contact me.

      Regards,
      Allan Madan and Team

  16. Greg Odmeg says:

    Hello,

    I have a used 2006 GMC diesel truck. Having just sold it to my company, is it true that I cannot claim CCA on it this year? If this is true, what dollar amount do I use for CCA next year?

    • superAmin says:

      Hello.

      Since you no longer own the truck as of year-end, you cannot claim CCA personally if you were previously entitled to. However, your company can. In the first year, it would be half of the regular rate. If this is the company’s first year, the CCA must be prorated by the number of days in the fiscal year. If you were using the truck for business before the sale, you can claim CCA. However, you will have a disposition. Also, make sure that you are not liable for any transfer taxes.

      Regards,
      Allan Madan and Team

  17. yesar44 says:

    I’ve recently started my own small business and found your article to be very insightful. However, I want more exposure for my business and was wondering how writing off advertising would work (I saw that you mentioned it as a taxable write-off). I’m just looking to do some local advertising in newspapers and there’s a local radio station and community television station nearby that I might inquire about running a commercial of some sort. Are these eligible for a tax write-off?

    • amadan says:

      Advertising and promotion of your small business do qualify as a tax deduction by the CRA. For newspaper ads and television/radio station ads, they have to be Canadian run and operated.

      You can deduct all of the cost of your advertisement in a news publication if the publication’s content contains more than 80% of original content compared to their advertising content. If they have less than 80% of original content compared to their advertising content, then you can deduct 50% of the advertising costs.

      However, your advertisement must be towards a Canadian market. If you advertise towards Canadians with a foreign broadcaster, you will not be eligible to claim any advertising deductions.

  18. Chrysanthos Konstantinos Pachis says:

    Hey Allan,

    For the first time, my business well be writing off some damaged and obsolete equipment this year. We have a list of everything of everything we bought, but how would I go about writing off the equipment I no longer need?

    • superAmin says:

      Hello.

      Equipment that is damaged, obsolete, or worthless can be taken off your records. This will increase your expenses, and lower your tax liability. With your list, you should mark all equipment that is:

      1. Obsolete
      2. Worthless, or damaged beyond repair
      3. Damaged, but still usable.

      For the first two, write the full value of the of the equipment for write-off. For the last, list the reduction in value for write-down. For example, let’s say you have a computer you bought for $2000. This computer is sitting in a closet, because it’s obsolete. In this case, you can expense the full $2000. If it was damaged, and the value is $300 less, you can list the $300 as an expense. This will reduce the book value to $2700. The total of all these write-offs and write-downs can be taken as an expense on your return. The assets are then reduced in value.

      Regards,
      Allan Madan and Team

  19. Cheryl says:

    I own a small business which operates out of my home. It is to my understanding that I can write off home-office expenses such as office space. Can this cost still be written-off if my office is in a home that I am renting?

    • superAmin says:

      Yes you can still deduct this expense even though you are working out of a home that you are renting. As mentioned though, you cannot write off 100% of this expense. The process of finding the amount that you are able to deduct from a rented house or apartment is the same as how you would find it for a fully-owned home. The amount you can deduct is equal to the percentage of the rent and maintenance costs that are used towards the business.

  20. Francis Baker says:

    Hello,
    Can I rent out my primary residence to family? I paid off my condo, but I can’t sell it. I am worried, therefore, about being hit with a tax I can write off. I also wish to write of strata fees. Do I have to live elsewhere if I rent to a spouse, or adult child?

    • superAmin says:

      Hello,

      You are able to rent to anyone. There is no requirement to take a capital deduction against a residence that is partly used as a rental property. If no capital allowance cost is taken, the capital gains exemption on the principal residence is not at risk.

      Regards,
      Allan Madan and Team

  21. Ravi Shanka says:

    Hey Allan,

    I recently started a home decorating business. I am trying to prepare for filing taxes for next year. I want to make sure my record keeping is up to date, and I am saving for all appropriate expenses. However, I am not sure what I can write off. Are there strong guidelines around what I can and cannot write-off?

    • superAmin says:

      Hello,

      I am assuming that as you just started the business, you are running a sole proprietorship. As someone who works for themselves, you will need to keep detailed records. Mileage, vehicle expenses, advertising expenses, utilities, supplies, and repairs all must be kept. If you work from your home, you may be entitled to a pro-rated portion of your rent, real estate tax, mortgage, utilities insurance, and other home-related items.
      You may also be able to depreciate your home, and the equipment you purchased for the business. For more information, please read the article above. If you need more information, please don’t hesitate to contact me directly.

      Regards,
      Allan Madan and Team

  22. Jin says:

    Hello,

    Just a quick bit about myself. I work from a home office Monday to Friday. During this time, I work 9-5 in sales for a .com company. I am also a 50% owner in a small e-commerce business that I run out of my home. Finally, I also own a rental property about 1.5 hours away. Currently, I write off a portion of my home expenses (mortgage interest, utilities, insurance, etc.). My work provides a T220. I also write off vehicle expenses, incurred in the upkeep of my rental properties.

    Can I write off additional expenses, since I run a business out of my home as well? Will this complicate my tax situation? Will I open myself up for an audit if I start writing off too much stuff? Even though I can justify it, as I do legitimately work from home and need my car for both the rental and my e-store.

    • superAmin says:

      Hello.

      Unfortunately, you cannot write things off twice. Each area is a separate business, so they will be on separate statements. If a single area is used for more than one business, just allocate half of the area towards each business. For the car, record the travel in your mileage log. Note which business the travel is for. If a given trip is for more than one business, divide it by two.
      High expense claims relative to business revenue and compared to other businesses in your industry can be a flag for audit. If the expense is legitimate, make sure you have accurate records to back up your claim. If you need more information, or help getting your records in order, I would be happy to help you.

      Regards,
      Allan Madan and Team

  23. Vikram Devadas says:

    I have a cottage that I am renting out. Is it possible to write off maintenance costs against the income from selling a non-principal residence? It seems like this should be possible. However, I was not able to find any information indicating if this is allowed. Money has to go into it to maintain some value. Otherwise, it’ll decay. I imagine there could be a sliding scale where the time value of the ‘maintenance money’ would reduce to zero. Thoughts?

    • superAmin says:

      Hello,

      You can write off maintenance expenses, but if you’re upgrading things then no. You must replace carpet with carpet and the like otherwise it’s a capital improvement and not deductible. Permanent additions/improvement add to the adjusted cost base, but the CRA considers repairs/maintenance carrying expenses and so they don’t affect capital gains calculations. You can find more information at: http://www.craarc.gc.ca/tx/bsnss/tpcs/rntl/bt/rprt/xpns/menu-eng.html.

      Regards,
      Allan Madan and Team

Leave a Reply

Your name and email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>