As a Canadian small business owner, you can take advantage of various business-related expenditures integral to your business operation by claiming small business tax deductions. By writing off applicable business expenses under the CRA’s Statement of Business or Professional Activities (Form T2125), you can reduce taxable income and taxes payable, and get back a significant tax return that will be beneficial to your business affairs. As a pro tip, save your receipts, safekeep your agreements, and document all purchasing activity in a logbook in case you need to provide proof of payment.
Give yourself a tax break — these business expenses are all eligible for tax exemptions to small business owners in Canada:
1. Business management expenses
Business owners can deduct annual license fees, business taxes, membership dues for professional organizations, and fees for trade or commercial associations. The list of eligible business management expenses also includes mail and delivery costs, online marketing fees (such as domain name registration and web hosting), business card orders, and bank charges for payment processing. Additionally, if you have utilized external professional consulting or services for your business, such as for seeking legal advice and accounting assistance for preparing your income taxes, the fees paid are eligible for small business tax deductions.
2. Business insurance premiums
The following types of business insurance qualify for small business tax deductions in Canada:
- General Business Liability Insurance for protection from potential lawsuits associated with injuries
- Business Property Insurance for protection of business assets (such as building and equipment) in case of destruction
- Business Interruption Insurance (in addition to business property insurance) for covering business losses resulting from natural disasters and fire
3. Media advertising costs
Media advertising involving the following ad streams qualify for tax deductions in Canada:
- Canadian market television and radio broadcast stations
- Canadian market magazines and newspapers
Note: At least 80% of the material used must be journalistic in nature (if less than that, only 50% can be written off). Further, advertising must not take up the majority of the content space.
4. Vehicle expenses
Vehicle expenses include insurance, registration, lease payments, parking, toll charges, fuel, oil, and other maintenance charges qualify for small business tax deductions in Canada.
To calculate your claim amount, divide your business mileage (in kilometres) by your total mileage driven during a calendar year. Multiply this amount by your total expenses to determine the deductible business part of your vehicle expenses claim.
5. Meals & entertainment expenses
Food, beverages, and entertainment expenses related to entertaining clients are 50% tax deductible. Entertainment expenses include tickets and entrance fees to an entertainment or sporting event, gratuities, cover charges, and room/suite rentals. 100% deductions apply to staff events or parties (of up to 6 events per year) and registered charity fundraisers.
6. Travel expenses
Business professionals who travel to professional events and conventions can take advantage of the claim limit of two events per year. Eligible travel expenses include public transportation fares, hotel accommodation, and meals (including taxes and tips, and again subject to a 50% claim rate). It should be noted that the event needs to be held in the same area that the event organizer conducts its business.
7. Operating expenses
Expenses attributed to the smooth operation of your business, including rent, are eligible for generous small business tax deductions. Office space expenses such as insurance, heating, and electricity are normally fully deductible at 100%.
Office supplies include items such as computer software, stationery, paper, and stamps. You can also deduct the cost of items used indirectly by the business to provide goods or services to clients and customers.
8. Home business expenses
Otherwise referred to as business-use-of-home expenses, home business deductions are applicable to you if you run your company out of your home. Your home office must be your principal headquarters of business or is a space designated solely for business use. Valid claims include mortgage interest, insurance, property taxes, telephone, internet, utilities (such as heat, electricity, and water), cleaning, maintenance, and repairs. To determine your claim percentage, calculate the percentage of your home that your office occupies. If your residence is used both for business and personal purposes, divide the hours used for business by 24 hours, then multiply the result by the total of business expenses to be claimed to calculate the total cost you may deduct.
9. Capital property
Capital property refers to assets that are intended to provide benefit to your business for years to come, such as vehicles, furniture, fixtures, equipment, computers, or buildings. Purchases of intangible property such as goodwill, franchises, and concessions are eligible for this categorization as well. Capital property is considered depreciable property (property that loses value over time), with a percentage of the purchase cost eligible to be claimed each year as informed by life expectancy of the item. The annual depreciation amount rates of capital cost allowance (CCA) claims are determined by the CRA’s list of the classes of depreciable property.
10. Employee salaries and benefits
As an employer, you can deduct your part of the amounts payable on employees’ remuneration with regards to the following:
- Canadian pension plan (CPP) contributions
- Employment insurance (EI) premiums
- Provincial parental insurance plan premiums (in Quebec)
- Workers’ compensation amounts
Business owners may also claim a deduction for hiring family members, and thus, they may deduct the salary paid to your child or your spouse under your employment, so long as the work they do is necessary for earning professional income. Additionally, income splitting may allow you to be eligible for dropping your net income into a lower tax bracket.
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