Tax deductions
There are many tax deductions available to small business owners in Canada aimed to decrease a business’ taxable income and tax payables.
Accounting and Legal Expenses
Fees relating to the business’ accounting related expenses and legal matters in the regular course of operations can be claimed on the income tax return to lower the tax payable amount.
Advertising Expenses
Advertising expenses incurred by the business can either be fully or partially claimed based on the nature of the cost. Most advertising and promotion costs can be claimed as tax deductible business expenses in the year they are incurred unless there is an enduring benefit to the business such as website development costs. Things like websites must be claimed over the useful life of the asset otherwise most other advertising/promotion costs can be claimed during the year the expense occurred.
Bad Debts
A bad debt expense is for amounts that you are owed but have not been able to collect. The Canada Revenue Agency allows businesses to claim all bad debts, except for those regarding mortgage or resulting from a conditional sales agreement.
Depreciation Expense
A significant tax deduction for small businesses in Canada is depreciation on capital assets, such as computers, equipment, furniture and fixtures, and more. It is important to note that the entire cost cannot be written off within one year. Still, alternatively, they will be written off over time based on a specific rate of depreciation stated by the Canada Revenue Agency. In the first year, the half-year rule is applied to capital assets, which allows for only half of the capital cost allowance to be claimed. It is suggested that capital purchases be incurred directly before the fiscal year-end for small business owners to take full advantage of the benefits regarding the depreciation deductions on the associated assets.
In 2018, the government announced a new initiative that would allow for enhanced tax treatment for certain capital assets acquired then or in later years. This program is referred to as the Accelerated Investment Incentive and allows for greater depreciation claims on most capital assets acquired during the year. Furthermore, the CRA would also allow businesses to write off the full cost of specified clean energy equipment all in the year of purchase as opposed to a number of years.
Donations
Donations made through your organization can be written off by the Canada Revenue Agency. To be eligible for the write-off, the charity must be a registered Canadian charity. The majority of large charity organizations offer donation receipts upon donating – you should keep these receipts safe since they are useful when completing your tax return. Anything relating to helping a charity from donating cash to your vehicle mileage can be claimed.
Home Office Expenses
Home office expenses are known to be the most common type of tax deduction for small businesses in Canada to take advantage of. Essentially, owners can claim deductions on specific expenses relating to a home office space. To be eligible for this deduction, a small business owner must be working primarily from a home office. Types of expenses included are mortgage interest, utilities, property taxes, repairs and maintenance, and home insurance. The amount of expenses that are eligible to be written off is dependent on the proportion of the office to the home size.
Insurance Expense
On the other hand, premiums paid on qualifying insurance types can be written off by small business owners. These insurance categories include General Business Liability Insurance, Business Property Insurance, Business Interruption Insurance, and Life Insurance. General Business Liability Insurance can be fully claimed and is used to protect a business from plausible lawsuits relating to injuries. Business Property Insurance is used in the case of destruction to preserve all business assets including, equipment and buildings. This type of insurance is not inclusive of home spaces regardless if you work from home. Business Interruption Insurance is in addition to property insurance and is used as coverage for business losses incurred from natural disasters. A portion of Life Insurance can only be claimed if the small business owner’s life insurance policy is the collateral on a business loan.
Interest and Bank Charges
The interest on borrowed money for earning a profit through dividends, royalties, interest, rent, or income can be written off. Similarly, bank transaction fees incurred when processing payments in the business bank account can be claimed. Note that bank charges don’t include employee salaries and rental expenses – these expenses should be separately mentioned.
Meals and Entertainment
Another Canadian small business tax deduction is that 50% of the amount spent on meals and entertainment relating to the business can be claimed, but the amounts claimed must be supported by receipts. Furthermore, small business owners can claim the entire amount of the meal/entertainment in cases of staff events or parties, with a limit of 6 each year, and additionally for and registered charity fundraiser.
Property Taxes
Property taxes paid on your business building and land can be claimed. If you use your home to conduct your business, the property taxes incurred on your home can be incurred; However, note that this amount cannot be claimed as a property tax expense, but it can be claimed under business-use-of-home expenses or home office expenses.
Rent Expenses
Another method to reduce taxes would be to claim the amount of rent expense incurred for the office space. It is pivotal to maintain a record of rent receipts and the lease agreement as these documents will be required to be submitted should the Canada Revenue Agency request an audit.
Repairs and Maintenance Expenses
The amount incurred to cover repairs and maintenance for your business can be claimed. The repairs and maintenance projects carried out to increase business earnings claims. However, the cost of your labour, expenditures capitalized, and repairs reimbursed by your insurance company cannot be claimed. Please note, you should not include upgrades to a property/asset as repairs and maintenance either.
Salaries and Wages
Salaries paid to employees are beneficial not only to them but also to your business as well – the salary you pay to your employees can be deducted. By claiming the salary and wages as well as all other payroll related expenditures, you can significantly reduce taxes during the respective tax year.
Travel Expenses
Any travel expenses that were incurred strictly for business purposes can be claimed. These expenses can range from the costs of taxis, trains, plane tickets, accommodations, and more. In addition, vehicle expenses either for business travel or other business purposes can be claimed.
Vehicle Expenses
Likewise, another beneficial tax deduction for small business owners in Canada is the ability to write off vehicle expenses. Expenses in this category include capital cost allowance (CCA) on a vehicle you own, fuel and oil, car insurance, lease payments, fees for parking, repairs and maintenance, toll charges, and vehicle registration fees. The amount of expense that can be claimed is proportional to the amount of your business mileage to the total vehicle mileage during the fiscal year. It is mandated by the Canada Revenue Agency to retain an accurate logbook containing information about the amount of personal and business use by the vehicle to be verified. Note that if the owner of a small business owns a car, they can only deduct 30% of their vehicle’s cost each year as depreciation until the value of the vehicle has been deducted. This depreciation is limited to $30,000 + HST for the purchase price of the vehicle unless it is a electric/hybrid vehicle that may qualify for an enhanced depreciation limit of $55,000 + HST.
Financial statements help provide an accurate picture of a company’s overall financial health to make better decisions. They can be prepared using similar information as that of when preparing your small business tax returns. There are many different tax deductions available to small business owners encouraging money savings through a reduction in their taxable business income and payable. However, it is important to consult with a professional accountant to discuss the specific business circumstances surrounding an owner and the tax benefits. If you have any questions or want to connect with an Accountant at SRJ Chartered Professional Accountants, please feel free to contact our offices at info@srjca.com or by phone at 647-725-2537.
Please note that the information presented in the article is provided as general information. This article does not consider your personal circumstances and it is not advised to be utilized without consulting a professional in the field. SRJ Chartered Professional Accountants will not be liable for any issues that arise from the usage of the information presented in this article.
FAQ’s
- What can a small business write off in Ontario?
Small businesses in Ontario have various tax write-offs available to them. As aforementioned, a few of them include accounting and legal expenses, advertising expenses, bad debts, depreciation expenses, donations, home office expenses, insurance expenses, interest and bank charges, meals and entertainment, property taxes, rent expenses, repairs and maintenance expenses, salaries and wages, travel expenses, and vehicle expenses.
- What can you write off for taxes in Canada?
There are various write-offs available to Canadians; however, it is dependent on the type of taxes you are filing; as the write-offs differ for individuals, corporations, and small businesses. The above article gives a comprehensive overview of the tax write-offs available to small business owners.