Business -> Business Expenses
What Expenses Can I Write Off Against My Business Income?
In general, expenses incurred in order to earn business or property income are tax deductible. Many of your expenditures will be fully deductible in the year in which they are made. There are exceptions and limitations.
According to IT-143R3 paragraph 13 (Archived), the expenses of incorporation, reorganization or amalgamation, including all expenses incurred to bring a corporation into existence, are considered by Canada Revenue Agency (CRA) to be eligible capital expenditures, and cannot be deducted in the same way as other expenses. However, the Federal 2016 Budget introduced proposed changes to eligible capital expenditures, and these expenditures will now be included in a new capital cost allowance (CCA) class. See the eligible capital expenditures article for more detail.
Capital costs, or fixed assets, such as land, buildings, vehicles, machinery and equipment, computers, etc. are not fully deductible in the year they are purchased. These items will be recorded on your balance sheet as assets. For accounting and tax purposes, you will write off a portion of their cost (except for land) each year. This is called depreciation or amortization for accounting purposes, or capital cost allowance (CCA) for tax purposes. The Income Tax Act specifies what rate can be used to write off the fixed assets as capital cost allowance, and the CCA will often differ from the depreciation recorded on your financial statements. Land can never be written off as an expense unless you are in the business of buying and selling land.
Capital cost allowance rates were increased for computer equipment (from 45% to 55%) and for certain other assets purchased after March 18, 2007. The 2009 Federal Budget announced that 100% capital cost allowance would be available for computer equipment purchased after January 27, 2009 and before February 2011. Ask your tax advisor how this applies to your purchases, and how separate classes for rapidly depreciating electronic equipment can help you.
Inventory will be written off against income when the goods are sold. Until that time, the costs are recorded on your balance sheet as inventory.
Prepaid expenses will only be partly deducted in the year paid. The portion related to a future fiscal year will be expensed in that year, and recorded on the balance sheet as prepaid expenses until then.
Accruals should be done at the end of the fiscal period to record costs which have been incurred but not paid. This ensures that your costs are recorded for tax purposes, and that you claim your GST/HST input tax credits at the earliest possible date.
The above information regarding prepaid expenses and accruals describes record keeping when the accrual basis of accounting is used. Those people who are in a farming or fishing business, or who are self-employed commission sales agents, are allowed by the Income Tax Act to use the cash basis of accounting, and record all revenues and expenses when the payment is received or paid.
Your income statement and other financial statements should be prepared according to "Generally Accepted Accounting Principles", or GAAP. In order to accomplish this, you need to keep receipts and detailed information about your expenditures, so they can be properly classified by you or your accountant.
Costs of haircuts, dry-cleaning, most clothing and clothing repair are not deductible business expenses. See the Tax Court of Canada case Weber v. The Queen.
Uniforms are added to capital cost allowance Class 12, which has a rate of 100%. The half-year rule does not apply to uniforms, or to most items in Class 12, allowing 100% write-off in the year of acquisition.
For more information on capital cost allowance see our article on Capital Cost Allowance, which includes a link to Schedule II of the Income Tax Regulations.
For more information on business expenses see the Canada Revenue Agency (CRA) T4002 Business and Professional Income Guide Chapter 3 - expenses (see link to T4002 below). This chapter has a table which helps to determine whether an expense must be capitalized, or if it can be expensed - see Chapter 3 - current or capital expenses?
Items that can be expensed but are used partly for business use and partly for personal use would be expensed according to the percentage of business use. An example of this would be cell phone usage costs. Capital items that are also use partly for personal use would be capitalized at 100% of the cost, and depreciation would be determined each year based on the % of business use. See, in CRA's guide T4002, Personal use of property under "Special situations" in Chapter 4.
If you are making a trip entirely for business purposes, i.e. to earn business/professional income, then the related travel expenses, as long as they are reasonable, should be deductible, subject to the 50% limit on meals and entertainment. If you take time to do some personal activities during that time the costs of the personal activities would not be deductible. If the length of the trip is extended in order to add personal activities (activities which would not have been considered were it not for the business trip), then additional costs (hotels, meals, etc) related to the trip extension would not be deductible.
Canada Revenue Agency (CRA) Resources:
- Business Expenses, with links to more information on each type of expense
Related Tax Court Case:
Revised: December 28, 2018
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