As a small business owner, you want to reduce the amount of taxes you pay each year. Although paying your taxes is something you likely dread, it does provide the opportunity to save money. Here we look at what you can claim as business write-offs in Canada to help you reduce your tax burden this tax season.
What Are Business Write-Offs In Canada?
Business write-offs are tax deductions the Canada Revenue Agency (CRA) allows business owners to deduct from their total taxable income. It is important to understand all the write-offs available because it is possible you could reduce your income enough to enter a lower tax bracket. Even the smallest tax deductions can add up to a significant, if not at least respectable, amount to reduce the taxes you pay each year. In our books, we figure any reduction is worthwhile.
Tax write-offs for businesses in Canada are based on money you spend while running your business. Known as business expenses, you can “write off” or deduct expenses specific to your business, including:
- Items used exclusively to operate your business
- Costs related to space used exclusively to conduct your business, including space in your home
- Expenses incurred while performing business, such as gas when using your vehicle to attend a meeting, or a restaurant bill covering the client’s share of a business lunch
The key to ensuring you do not overstep your right to claim deductions is only to claim expenses exclusively related to your business.
What Are Common Small Business Tax Write-Offs Canada Offers?
Common tax write-offs for small businesses in Canada include:
- Start-up costs: The costs to start your business, such as equipment, as well as services such as legal and accounting, can be claimed the first tax period you file your business taxes.
- Marketing: Marketing write-offs include developing and executing all forms of marketing, from printing business cards to company t-shirts, and graphic design services to attending trade shows.
- Advertising fees: This is separate from marketing and includes the costs to run ads on TV, radio or in publications; and digital marketing, including costs related to your website such as design and hosting.
- Business supplies: Anything needed to run your business, such as specific tools and materials to manufacture a product or provide a service, are deductible.
- Office supplies: This is specific to office items like paper, pens, paper clips, as well as maintenance items like cleaning supplies — but not capital items like office furniture and equipment.
- Rent: Rent for the building and land used for your office or operations is deductible.
- Home office: You can deduct the percentage of space used in your home to run your business, including the mortgage or rent, as well as a percentage for heat, electricity, insurance, maintenance, mortgage interest, and property taxes.
- Telephone and internet: These costs must be related to business use only.
- Salaries, wages, benefits: If you have employees, you can deduct their gross salaries, Canada Pension Plan (CPP), and Employment Insurance (EI).
- Independent contractors: Fees for independent contractors or freelancers are tax deductions.
- Meals and entertainment: You can only deduct 50% of the amount spent to “entertain” clients, whether it is lunch or a basketball game.
- Travel: 50% of business travel expenses, including the hotel, transportation, and meals can be deducted.
- Delivery/shipping: Things like couriers and postage can be deducted.
- Professional fees: Your fees to pay your accountant, lawyer, bookkeeper, etc., are deductible.
- Company vehicle: Expenses related to the vehicle used for business, not the vehicle cost itself, can be deducted, including interest on a vehicle loan, parking, gas, maintenance, insurance, etc.
- Accounting and tax prep software: If you use software to do your own taxes, you can deduct the cost of the software.
Some less common tax write-offs you can take advantage of include:
- Professional memberships: Annual dues for commercial or trade organizations are deductible unless the association leans more towards recreation or dining as opposed to a meaningful business function.
- Bank fees: Fees related to bank management, administration, and processing are deductible.
- Interest on loans: Interest incurred for business loans or property can be deducted but with some limitations.
- Property taxes: This would be for land and buildings for your business location or home workspace based on the percentage of space used.
- Commercial insurance: This includes commercial insurance premiums for your business property, machinery, and equipment.
- Debt: Unpaid invoices for income claimed on your income taxes can be written off, as well as the cost of recovering money owed, such as a collection service.
- Private health premiums: If you have a private plan for yourself or your employees, the premiums are deductible.
- Protective clothing: If your company provides services requiring safety clothing such as PPE, safety boots for construction, goggles, etc., these items are deductible.
Understanding your deductions ensures you can take advantage of all deductions that apply to you. The more deductions available, the lower your taxable income.
There are also some deductions small business owners sometimes assume they can make but aren’t actually eligible as tax write-offs. A good example is that although there are deductions related to employee payroll, you can’t make deductions associated with your own labour costs. You also can’t claim something like a parking ticket just because you were parked illegally while visiting a client or picking up materials related to your business. Although special uniforms or protective clothing are deductible, “business clothes” such as suits and ties are not.
Another misconception is that because professional associations and membership fees are deductibles, you can deduct a club membership. However, even if you conduct business meetings or use the club to find new clients, they are not tax write-offs.
The last assumption is related to insurance. This is often a misunderstood write-off because you can claim premiums for private health care as well as commercial insurance but can’t claim insurance premiums for life or disability plans.
The best way to avoid audits or, worse, accusations of tax evasion is to work with an accountant who understands tax laws.