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 your 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
Home-office expenses is one of the most common tax write offs for small businesses. These expenses include:
• Mortgage interest on your residence
• 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, then the percentage of your home office expenses that you can deduct is equal to the space that your home-office occupies in your home. So if your home is 3,000 square feet and your office is 300 square feet, then you can claim 10% (3,000 divided by 300 = 10%). Then, if your home office expenses for the year were $5,000 you would claim $500 (10% of $5,000 = $500).
2. Vehicle Expenses
Vehicle expenses are a major tax break and is a commonly used tax write-off for small business owners operating in Canada. Vehicle expenses include:
- Fuel & oil
- Lease payments (if you lease)
- Parking fees
- Repairs & maintenance
- Toll charges
- Vehicle registration fees
If you own your vehicle, you can write off 30% of the cost of it each year, which is referred to as Capital Cost Allowance. You cannot claim 100% of your vehicle expenses, but you can deduct the business portion. I.e. if you drove 20,000 km in the year, but only 50% of those kilometers were for business purposes, then you can deduct 50% of your vehicle expenses. In order to verify that the vehicle is in fact being used for business, the CRA requires that a log book be maintained. Information you should include in the logbook is:
- Your destination
- The reason for the trip
- The distance the trip covered (measured in kilometers)
3. Accounting & Legal Fees
Accounting Fees: If your business requires an accountant to prepare your tax return, you can fully deduct the tax return & accounting fees from your business income.
Legal Fees: If you need a lawyer for 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 the cost of the capital asset purchased.
You can claim a tax deduction for rent paid for a property used in your business. Other rental expenses, such as base rent and common area maintenance (CAM) costs can also be written-off, as long as these costs are related to the operation and maintenance of your business.
Base rent refers to the minimum rent due each month under the terms of a lease, with additional costs such as holding costs and building service charges.
Common area maintenance (CAM) costs are any fees paid to the landlord for maintaining, repairing, and operating areas of the building.
There are 4 main advertising methods for small businesses in Canada:
1) Online: all internet-based advertisement expenses that are related to your business are fully tax deductible, including your website’s domain name registration and web hosting.
2) Newspapers: only Canadian-owned and published newspaper advertisements are tax deductible. Those placed in foreign-owned, edited, and printed papers are not.
3) TV & Radio: expenses can be deducted as long as they are Canadian-owned and operated. Expenses cannot be written off if the advertisements were made with a foreign broadcaster, even if they are directed at Canadians.
4) Magazines/Periodicals: the entire expense can be deducted if the advertisement is directed to a Canadian market and at least 80% of the non-advertised space in the magazine/periodical is original content. Otherwise only 50% of the expense can be written off.
6. Meals & Entertainment
When you entertain clients for the purpose of earning business income, certain costs will be tax deductible. If you take a client out for dinner or enjoy a live Blue Jays game, 50% of the cost can be deducted. If you cannot provide a receipt, a reasonable amount can be deducted, which the CRA states is 50% of $17 per meal or a maximum of $51 per day.
There are certain circumstances where you can deduct 100% of the cost of meals or entertainment. These include:
• A staff or holiday party (6 allowed per year)
• Meals that are provided for a fundraiser to benefit a registered charity
• When meals and/or entertainment are provided as compensation to customers (restaurant or hotel)
The CRA offers insurance policy owners deductions on their tax returns on different types of insurances for small business owners. These types of insurance include:
General Business Liability Insurance:
This type of insurance is fully deductible on your personal return and protects your business from:
- Injuries that occur on your premises
- Injuries that occur elsewhere as a result of the actions of an employee
- Third party property damage caused by an employee
Business Property Insurance:
Covers all business assets in case of destruction. If your business is run from home, you will still need this insurance even if you have home insurance, as it does not cover the business portion. Property insurance premiums can be used as tax write-offs for small business owners through their personal tax return.
Business Interruption Insurance:
This is an add-on to property insurance and a wise investment for small businesses. In the event of a natural disaster or fire, it will cover you for all earned income you would have made during the time your business was closed. Premiums paid for this insurance can be tax write-offs for small businesses on their tax return.
Life insurance policies and other personal policies cannot be claimed as a business deduction. In order to be able to claim an insurance policy as a deduction it must be related to your business. 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.
8. Capital Assets
Tax depreciation (i.e. capital cost allowance) is a write-off for small businesses. A capital asset is something of tangible value, which will last a long period of time (usually over 1 year). These assets are written-off over a period of time based on the CRA’s specified depreciation rates.
Here are the CRA’s depreciation rates for 2016:
- Computer costs – 55% per year.
- Computers/Computer equipment (scanner, printer, hard drive, monitor, etc.) – 55%.
- Software – 55% per year.
- Building – 4% per year.
- Furniture & fixtures – 20% per year.
- Vehicles – 30% per year.
Tip: Make capital purchases right before the end of the year so you can take advantage of depreciation deductions on purchased assets. In the first year only half of the CCA can be claimed.