Essential Tax Deductions for Home-Based Businesses That You Shouldn’t Overlook in Canada

Dec 11, 2023

Operating a business from home in Canada mirrors the tax obligations of traditional businesses with regard to income taxes. Provided you have earnings to offset and adhere to the regulations, numerous business expenditures can be subtracted, thus reducing your income tax liability.

A benefit of managing a business from your residence is the eligibility for extra income tax deductions. You might find that six of these frequent deductions are applicable to your circumstances.

 

Automobile Expenses

Numerous owners of home-based businesses in Canada operate their personal vehicles for business-related activities. This approach presents tax advantages, as it enables them to deduct expenses associated with the business use of their vehicle, which include:

  • Fuel and oil expenses
  • Fees for licensing and registration
  • Business-specific supplemental insurance is entirely deductible. However, if your vehicle is not covered for business operations and you encounter an accident while conducting business, your insurance claim may be rejected.
  • Costs for maintenance and repairs
  • Interest on loans taken out to buy a vehicle for business use. It’s important to note that the Canada Revenue Agency (CRA) sets a cap on the amount of interest that is deductible.
  • Charges for leasing
  • Repairs from accidents that occur while the vehicle is used for business purposes. These vehicle expenses must be detailed in the motor vehicle section of the T2125 Statement of Business or Professional Activities form.

A useful tax tip is that since you can only deduct a fraction of your vehicle expenses if the vehicle is utilized for both personal and business reasons, the CRA mandates the tracking of the total kilometers driven alongside the kilometers driven for earning income. The claim for automobile expenses is then adjusted proportionally to the business-related portion of the total kilometers driven during the tax year. For keeping track of these details, vehicle logbooks can be purchased at stores selling office supplies.

Insurance

Insurance costs for structures, devices, and tools utilized in your enterprise, including insurance for businesses operated from home, can be subtracted from your taxes.

Insurance specifically for home-based businesses is distinct from standard homeowners’ insurance. Operating a business from your residence without securing home-based business insurance exposes you to potential risks, as incidents related to your business activities might not be covered under your regular home insurance, especially if your insurer isn’t aware of your business operations, thereby possibly voiding your policy.

Here’s a tax advice: A percentage of your home insurance expenses can be deducted if your home-operated business qualifies for the business-use-of-home deductions. When fitting, this deduction can be included as part of line 9945 on the T1 personal income tax return.

Office Expenses

Even if the only office space you have is a section of your kitchen countertop, your home-operated business can still claim office-related expenses. The key is to differentiate between everyday office supplies like pens, stamps, and paper clips, which are deductible on line 8810 of your T1 tax return, and capital assets such as filing cabinets, desktops, laptops, mobile phones, printers, and other equipment that are subject to capital cost allowance (CCA) rules.

Since capital assets depreciate over time, you’re allowed to deduct only a fraction of their purchase price from your taxes each year. The amount you can deduct varies depending on the type of asset. The Canada Revenue Agency (CRA) categorizes depreciable properties into various classes, each with its own CCA rate, with guidance available on the CRA’s website.

A tax-saving tip is that claiming your capital cost allowance isn’t mandatory in the year it’s incurred. By deferring your claim, you might reduce your future tax bills, especially beneficial if you anticipate higher earnings ahead.

 

Mortgage Interest & Property Taxes

If you have a mortgage on your residence and operate a business from there, you’re allowed to deduct your mortgage interest as a business-use-of-home expense, provided your venture qualifies for such deductions.

Typically, the cost associated with using a portion of your home for business can be written off if:

  • the area is the main venue for your business, or
  • the space is exclusively utilized to generate business revenue, and it’s used consistently and frequently for encountering clients, customers, or patients, as outlined by the CRA.

Homeowners who manage a business from their residence can also include their property taxes in their deductible expenses.

Renters have the opportunity to deduct their rent expenses as well.

However, it’s important to note that only a fraction of these costs are deductible. This fraction is determined by the extent and duration of your home’s use for business purposes. Detailed guidance on how to calculate the deduction for home-based business expenses is available.

A tax hint from the CRA suggests utilizing the “Calculation of business-use-of-home expenses” chart found on Form T2125. This aids in determining the permissible amount for business-use-of-home expense claims. Remember, the expenses claimed using line 9945 should not be duplicated elsewhere.

 

Other Business-Use-of-Home Expenses

In addition to costs such as mortgage interest, property taxes, or rental fees, individuals eligible for home-office expense deductions should note that several other types of expenses can also be claimed.

Among these additional deductible expenses are:

  • Heating
  • Lighting
  • Water usage
  • Maintenance and repair services
  • Cleaning supplies
  • Phone services
  • Internet services

It’s important to remember that the Canada Revenue Agency (CRA) permits the deduction of legitimate expenses that are directly related to generating income. Expenses claimed in this category should not be claimed under any other.

A useful piece of advice from the CRA highlights that any purchases or business costs must be backed by proper documentation. This includes sales invoices, purchase and sale agreements, receipts, or any supporting documents that validate the expenditure.

 

Transferring Remaining Home Office Expenses Forward

Business-use-of-home deductions cannot be applied in a manner that would result in or escalate a financial deficit for your business. Should your home-based enterprise incur expenses that surpass its income, you’ll be left with what’s referred to by the CRA as non-utilized home office expenses, available for deferral to the subsequent fiscal year.

This situation bears similarity to the unused capital cost allowance, offering the advantage that these expenses need not be immediately claimed in the subsequent tax year. Provided your home enterprise remains eligible for home office expense deductions, these postponed expenses can be strategically employed to mitigate taxes on future, higher earnings.

Maintaining detailed records is essential for tax purposes, ensuring that all claimed deductions are substantiated with corresponding receipts.

It’s advisable to explore all possible tax deductions, either personally or by consulting with an accountant, who, incidentally, can also be claimed as a tax deduction.

 

 

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 https://www.businessdocs.ca/

 

 

Launch Your Business in Canada

Contact us right now and we will help You!

Actions to Take After Receiving Your Incorporation Certificate

This guide on steps to take after incorporating a company is aimed at individuals who have recently completed the incorporation process in Canada. It provides answers to the question: "What actions should I undertake now that I have my incorporation certificate?"...

Incorporation in Canada

When you decide to start your own business in Canada, one of the first steps you might consider is incorporation. Incorporation involves creating a legal entity that is separate from its owners. This process is recognized across Canada and comes with a host of...

Incorporate Your Business in Canada

Curious about the process of forming a corporation in Canada? We're going to break down the main stages required, ranging from deciding on the location of incorporation to selecting a name for your corporation and submitting the necessary paperwork. Keep in mind that...

Claiming Business Expenses in Canada

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...

Starting a Business Out of Your Home in Canada

Running a home business offers the best of both worlds. It provides all the advantages that come with owning a small business. However, by operating from your home, you also get to enjoy flexible working hours, no commute, and some tax benefits. In essence, running a...

Canadian Income Tax and Your Small Business

Running a small business in Canada requires you to submit an annual business income tax return. A key element to managing a thriving business involves comprehending the process of filing and preparing Canadian income taxes, enabling you to secure the most favorable...