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 wr
ite-offs for a small business in Canada is home-office expenses.
Home-office expenses include:
-Mortgage interest on your residence
-Repairs & maintenance
You cannot write-off 100% of those expenses, but y
ou 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 exc
lusively 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 exempt
ion. 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 and is a commonly used tax write-offs for a small business owners operating in Canada. Car expenses include:
- Capital cost allowance (if you own)
- Fuel & oil
- 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.
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 bei
ng 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 write-offs for a small 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:
- 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.
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 Insuranc
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 used as tax write-offs for a small busines owners through their 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 tax write-offs for a 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
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 (allowe
d 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.
6.) Accounting and Legal fees
Another two tax write-offs for a small business owner in Canada are accounting and legal 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.
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 pur
chase 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.
Certain advertising expenses for your small business can either be fully or partially written-off. The rules depend on the advertising medium used, as well as where the media is based and operated. Here are the most common forms of advertising, and when these expenses can or cannot be deducted:
a. Online and Internet Advertising – 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.
b. Television and Radio
Advertising – You can deduct expenses from TV and radio advertisements, as long as they are Canadian-owned and operated. However, the expenses cannot be written-off if you advertise with a foreign broadcaster, even if the advertisement is aimed at a Canadian audience.
c. Newspaper Advertising – Just like with TV and radio advertisements, Canadian-owned and published newspaper a
dvertisements are tax deductible, but those placed in foreign-owned, edited, and printed papers are not.
d. Magazine or Periodical Advertising – You can write-off the entire expense if the advertisement is directed to a Canadian market and at least 80% of the total non-advertised space in the magazine or periodical is original content. However, if less than 80% of the original content is non-advertised space, you can only write off 50% of the expense. It doesn’t matter if the publication is Canadian or foreign-owned.
You can claim a tax deduction for rent paid in respect of 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 the fees paid to the landlord for operating, repairing, and maintaining common areas of the building. CAM costs are also called, “Common Area Operating” expenses.
If you have a home-based office, the rent expense related to the use of your home as a work or office space falls under the “Home Office Expenses” category, which we mentioned in more detail in this article (see point #1 at the top).
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.
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