If you’re a Canadian small business owner, we’re going to go out on a limb and say that tax season probably isn’t your favourite time of the year! Luckily, we’re here with our two favourite words to help take some of the stress out of this year’s return, and those words are – tax deductions!
All Canadian companies can deduct business expenses from their overall income, provided the expense was incurred to earn business income and was reasonable under the circumstances. By taking advantage of the many tax deductions available on a wide range of business expenses, you can significantly reduce your taxable income, allowing your company to keep more of its profits, and you to keep on smiling!
In this article, we’ll explore some of the best Canadian small business tax deductions that can help maximize your tax savings. From home office expenses to employee salaries and benefits, these are the deductions you need to know about to put your small business on top this tax season.
Small Business Tax Deductions
Home Office Expenses – Whoever coined the phrase “don’t take your work home with you” clearly hadn’t met a lot of small business owners. But the upside to all those late nights and weekends spent in the home office is that they can translate into a tax deduction!
Provided you have a dedicated workspace that is used exclusively for business purposes, you are eligible to deduct a portion of your home expenses – including utilities, mortgage interest, home insurance and property taxes – on your tax return.
The portion you can deduct depends on the square footage of your workspace in relation to the rest of your home. For example, if you have a 100 sq. ft. workspace in a 1000 sq. ft. home, then you are entitled to deduct 10% of your home expenses.
Business Use of Your Vehicle – If you use your personal vehicle for business purposes, you may be able to claim a deduction for the expenses related to its use. This includes;
- Gas and oil
- Parking fees
- Maintenance and repairs
- Insurance
- Leasing
- License and registration fees
If you took out a loan to purchase your vehicle, then you may also be eligible to deduct a portion of the interest on your loan payments, though you cannot claim the cost of the vehicle itself. To claim any vehicle deductions, you must keep a detailed mileage logbook that records all of your business mileage and expenses.
Office Supplies and Equipment – Offices require a lot of supplies to continue functioning optimally (if you’ve ever been in an office that’s run out of toner, then you’re familiar with how quickly things can descend into all-out anarchy). The good news is that most small items such as stationary, ink cartridges, stamps and even cleaning supplies are all tax deductible expenses.
Unfortunately, the cost of larger items such as desks, chairs and filing cabinets cannot be deducted as they are classed as capital items. The same applies to the purchase of computers, phones, printers, fax machines and other such equipment. However, if you take out a lease or a loan for these items then you can deduct the leasing costs or loan interest.
Business Supplies – Supplies that your business uses indirectly to provide goods or services are generally tax deductible. An example of this would be drugs and medication used in a veterinary clinic or hair products used by a barber.
Advertising and Marketing Expenses – Any money you spend marketing your business can be claimed as a deduction on your tax return. This includes the cost of developing, printing and distributing materials such as brochures, flyers, promotional items and business cards. It also includes the costs associated with trade shows and even covers store-front signage. Advertising fees are tax deductible too, including radio, television and newspaper ads within Canada, as well as digital advertising and the cost of web hosting and domain name registry.
Business Fees – You are eligible to deduct annual licensing fees and certain business taxes, as well as yearly membership dues for trade or commercial associations. But before you try and slip your annual golf club fees into this year’s return, be aware that you cannot deduct membership fees if the main purpose of the association is recreation!
Professional Fees – If your small business engages external firms for certain professional services, then the costs involved are tax deductible. This includes legal, consulting, bookkeeping and most importantly of all – accounting fees! Or, if your business isn’t yet in a position to seek external accounting services, then the cost of any digital tax preparation or bookkeeping software that you use can be deducted.
Repairs and Maintenance – This can be a huge hassle for small business owners, shifting their attention away from everyday business operations. The good news is that if you pay to repair or maintain a property that you use to earn business income, then you can deduct the cost of labour and materials. However, this does not include any of the following:
- The value of your own labour
- The costs you incur for repairs that are capital in nature (these are claimed as a capital cost allowance)
- The costs you incur for repairs that have been reimbursed by your insurance company
Travel Expenses – Travelling for business can be a rewarding experience, especially when you realize you can deduct certain travel expenses! Big ticket items like airfares and hotel accommodations are of course tax deductible, but you can generally also write off 50% of the cost of meals, drinks and even entertainment while you are travelling for business purposes.
Meals and Entertainment – Outside of travel, if you pay for any meals or entertainment as part of your general business practice, then you may also be able to write off 50% of their cost. This includes tickets to sporting events, cover charges, gratuities and room rentals. Restrictions to this deduction apply in certain circumstances so be sure to check with the CRA for eligibility.
Rent, Utilities and Property Taxes – When renting a space for the purpose of carrying on a business, the cost of the rent is tax deductible. You can also deduct expenses for telephone and utilities including gas, electricity and water, as well as cable, internet and cellphone air-time costs. And if you have to pay any property taxes for any of your workspaces then these will also be deductible
Employee Salaries, Wages and Benefits – A small business can have anywhere from 1 to 100 employees, which is great for productivity, and has the added bonus of creating tax write-off opportunities! For any workers that your small business employs, you can deduct their gross salaries as well as any premiums you pay for benefits such as the Canada Pension Plan (CPP) and Employment Insurance (EI). Any premiums that you pay for employee sickness, accident, disability or income insurance are also tax deductible, as are private health service plan premiums.
Independent Contractors – There will be occasions when your company has a specific project and you need to hire an independent contractor. An example of this would be hiring a freelance photographer to take employee headshots for the company website. Not only can independent contractors provide top-rate services to help your company succeed, but the cost of their work is also a great tax write-off!
Bad Debts – According to the CRA, a bad debt is a debt owed to you that remains unpaid after you have exhausted all means to collect it. This is never a fun situation for any small business owner to find themselves in, but the upside is that bad debts are tax deductible! This means you can deduct any accounts receivable that have been included in your income for the year, but that won’t be paid to you. And if you have to pay a lawyer or collection agency to recoup the balance owed to you, then these fees can also be deducted from your tax return.
Start-up Costs – Initial expenditures made for the purpose of starting a new business are often tax deductible. This can include legal, accounting and administrative fees. To deduct a business expense, you must be carrying on a business in the fiscal year in which the expense was incurred. Therefore, it is important to establish the date you started your business to determine whether the expenditure preceded the business or was part of the start-up costs.
Delivery and Shipping Costs – As a small business owner you are entitled to deduct the cost of delivery for items that are business related. This includes delivery services such as UPS and FedEx, as well as postage, envelopes and P.O. box rentals. The key term here is business related – meaning that crate of Timbits you shipped to your cousin in Australia, unfortunately, doesn’t qualify!
Bank Charges and Interest – As we have seen, if you borrow money for business purposes – including purchasing property and specific equipment – then the interest is often tax deductible. Certain bank charges such as interest reduction fees and early loan repayment fees can also be claimed as deductions.
When you take out a loan to buy or improve one of your business properties, some of the fees that you incur are tax deductible, including:
- Loan application, appraisal and processing fees
- Loan insurance fees
- Loan guarantee fees
- Loan brokerage and finder’s fees
- Legal fees related to financing
However, these types of fees must be deducted over a 5-year period, meaning you can only deduct 20% per fiscal year, unless you repay the loan before the end of the five years, in which case you can deduct the remaining fees in full.
Insurance – In today’s unpredictable world, insurance is an absolute must, and while the premiums can be steep, the consequences of not having it can be considerably steeper! On the bright side though, for most insurance policies taken out for business purposes, the premiums are tax deductible. This includes general business liability insurance and also applies to commercial insurance for buildings, machinery or equipment that are used for business purposes.
Final Thoughts
While there is no denying that tax filing is often a hassle for small business owners, it can also be a great opportunity to save your company money. Time dedicated to tax planning now will literally pay for itself in the future! Not only do tax deductions reduce your taxable income, but they can also bump you into a lower tax bracket, equating to even greater savings. Understanding which tax deductions your company can claim and staying up-to-date with them can have a big impact on your small business finances each and every tax season.
As we’ve seen, not all deductions are created equal, and some may have limitations or restrictions. Therefore it’s always advisable to consult with a tax professional to ensure that you’re claiming all the deductions you’re entitled to. By building a personalized plan and implementing the right business tax strategies, you can maximize your tax savings and set your small business on the path to success. Just be sure to keep accurate records of your expenses with original invoices should the CRA ever come a-knocking!
To learn more about tax planning and strategies that can help propel your small business to the next level, get in touch with our expert team.
