Claiming Business Expenses in Canada

Dec 15, 2023

Canadian taxpayers have the opportunity to reduce their tax bills by deducting business expenses when filing their tax returns. Those interested in taking advantage of these deductions should know that the Canada Revenue Agency (CRA) permits the deduction of any “reasonable” business-related expense.

According to the CRA, business expenses are defined as follows. Business expenses are:

…specific costs that are considered reasonable for a certain type of business and are incurred with the intention of generating income. These expenses are eligible for tax deduction. However, costs related to personal living or any expenses not directly tied to the business activities cannot be claimed for tax reduction purposes.

As a result, if you’re running a business, it’s crucial to clearly separate your business expenditures from your personal spending throughout the fiscal year. Maintaining an exclusive bank account for your business and adhering to solid accounting practices are effective ways to achieve this separation. Here are additional recommendations to help you fully leverage your business expense deductions.

 

Ensuring You Can Claim Business Expenses in Canada

It’s important to keep a few things in mind when considering the deduction of business expenses in Canada.

1. The term “reasonable” is crucial in this context. What might be a justified business expense for one company could be deemed unreasonable for another. For instance, it makes perfect sense for an interior designer to deduct the cost of client meetings over lunch, whereas it might seem unusual for a plumber to do the same.

Moreover, the amount you claim must be seen as reasonable by the CRA. Should the interior designer mentioned earlier claim $800 for a single business lunch, this could trigger suspicions and potentially lead to an audit by the CRA.

Should you find yourself uncertain about the validity of a potential deduction, consulting with an accountant is highly advised. Additionally, the cost of hiring an accountant for your tax return is, in itself, a deductible business expense.

2. The deductibility of business expenses is limited to those directly incurred in the course of conducting your business. For purchases that serve both personal and business functions, like vehicles or equipment, only the portion used for business is deductible. As an example, if you’re working from home and wish to deduct your internet fees, only the amount that corresponds to business use can be claimed, excluding any portion of the service used personally.

3. Documentation is essential for all business expense claims. While there are minor exceptions for certain types of meal and vehicle expenses, generally, you need to have receipts as evidence to support your claims.

Common Business Expenses

The list of business expenses from the CRA covers a wide range of common costs, such as accounting, utilities, and more, detailing the rules for income tax deductions applicable to each. Among these, expenses for motor vehicles and for meals and entertainment are frequently claimed deductions.

Should you have concerns or uncertainties about deducting a specific business expense, it’s advisable to consult with your accountant or get in touch with the CRA directly.

 

Is it Legitimate to Consider Taxes as a Business Expenses

When submitting your T2125 form for business expense deductions, the possibility of including the GST/HST you’ve paid on these expenses hinges on your status as a GST registrant and whether you plan to claim the GST/HST as an Input Tax Credit (ITC). Should you claim an ITC, the amount of your tax credit should be subtracted from your total claimed expenses on your income tax form.

As per the Canada Revenue Agency, if you’re taking advantage of an input tax credit for the GST/HST paid on business expenses, you need to adjust the reported amounts for these expenses on the T2125 Form, which is for Statement of Business or Professional Activities, by the credit’s amount. This adjustment is necessary whenever the GST/HST you’re claiming as an input tax credit was either paid or became due.

For instance, if during the fiscal year you’ve employed someone or outsourced some tasks, and you’re listing their remuneration or fees as a deductible expense (on Form T2125 of the T1 income tax return, assuming your business operates as a sole proprietorship or partnership), you should exclude any GST/HST you’ve already claimed when submitting your GST/HST return for the relevant period.

On the contrary, if you weren’t registered for GST at the time (like, if you were a minor supplier exempt from collecting and remitting GST/HST), you would add the GST/HST you paid on wages or subcontract fees to your claim, as this tax wasn’t deducted elsewhere. Similarly, if you’ve engaged services or outsourced work in provinces with a distinct sales tax system, such as the Quebec Sales Tax (only in Quebec) or Provincial Sales Tax (PST) in regions like British Columbia, Saskatchewan, Manitoba, those taxes should be included in your claim for wages or fees.

It’s important to remember that any payments or salaries made to the business owner cannot be claimed as expenses. Additionally, when detailing business expenses in Canada, any received rebates, grants, or other forms of assistance must be deducted from the expense they pertain to.

 

 

CBES is here to assist you; feel free to contact us for expert guidance.

 

You can find Contracts and Documents for Business Owners in Canada here businessdocs.ca

 

Launch Your Business in Canada

Contact us right now and we will help You!

Capital Cost Allowance (CCA)

Capital cost allowance (CCA) is one of several methods to lower your business's taxable income in Canada. The Canada Revenue Agency (CRA) describes it as "a tax deduction that Canadian tax laws allow a business to claim for the loss in value of capital assets due to...

Motor Vehicle Expense Claims on Income Tax in Canada

Did you use a vehicle for your business last tax year? This article outlines the motor vehicle expenses you can claim on your income tax in Canada and details the necessary documentation to support your expense claims. The examples provided here illustrate how to...

Canada Pension Plan (CPP)

The CPP, also known as the Canada Pension Plan, is a national program that aims to assist Canadians in securing income for their retirement or in the event of disability. It was instituted by Lester B. Pearson's Liberal government in 1965, except in Quebec where a...

Independent Contractor vs Employee in Canada

Understanding whether you are classified as an independent contractor or an employee is crucial for your Canadian income tax, especially if you believe you are a contractor but the Canada Revenue Agency (CRA) later decides otherwise after you have filed multiple tax...

Red Flags That Will Get Your Small Business a CRA Audit

Receiving a letter from the Canada Revenue Agency (CRA) announcing an audit is something every business or individual fears. Tax experts say about 35,000 such letters were issued in 2023. Business tax returns undergo intense scrutiny, and although there is no...

How to Manage Business Expense Records in Canada

Imagine if you were to create a comprehensive list of all the responsibilities necessary for running your business, and then arranged them according to your personal preference. Where would managing business expense records fall within that hierarchy? Would it be...