Did you know that there are a number of tax deductions available to small business owners in Canada? In fact, small business owners can write off a wide variety of expenses related to their businesses, including business use of home expenses, vehicle mileage, depreciation of assets, and more.
To help Canadian small business owners make the most of these deductions, we’ve put together a comprehensive list of tax deductions available to them. So whether you’re just starting out or you’ve been in business for a while, be sure to consult this list to make sure you’re not missing out on valuable tax breaks.
Small Business Tax Deductions – What Qualifies?
For an expense to qualify as a small business tax deduction in Canada, it must be incurred in the course of doing business. A qualified or allowable expense to be used as a standard deduction is a good or service necessary for the small business to operate.
For example, each time an employer reimburses their employees for mileage, the business can claim that cost. However, mileage costs incurred on the vehicle outside of completing business tasks cannot be used as part of the tax write-off.
Additionally, small business owners can only deduct expenses that are reasonable and directly related to their businesses. The inherent ambiguity of the small business tax deduction means each small business has different costs that may or may not qualify as tax deductions and credits.
When preparing a tax file, it’s best to consult with a professional bookkeeper to maximize deductions and prevent costly errors.
Common Small Business Tax Deductions
Examples of expenses commonly used as a tax deduction for a small business include:
- Business use of home expenses, such as a percentage of mortgage interest, property taxes, and home insurance
- Vehicle mileage
- Operating costs, such as electricity, heating, advertising, and more
- Depreciation of small business assets
- Professional fees and subscriptions
To better help small business owners understand what expense can and cannot be used as a tax deduction, the Government of Canada has broken it down into different categories.
The main types of tax-deductible small business expenses include capital, current, and operating expenses. It’s important for small business owners to know the difference between each expense category to prevent costly errors when filing a tax return.
Capital costs are one-time expenses that need to be incurred to purchase land, buildings and equipment necessary to operate a business. These capital costs are considered assets to the business and are not directly expensed. Rather, the depreciation on these assets can be claimed as an expense during the year, and used to reduce your business taxes.
For example, a local bike tour operating agency may want to expand its operation to include whale and wildlife viewing services. This would likely require the owners to purchase a boat to offer this service. The boat purchase would be considered a capital purchase.
Other examples of capital expenses include:
- purchase of a property or building to operate the business.
- purchase of equipment needed to deliver goods or services.
- office equipment and computers
- purchase of a vehicle
Current expenses are expenditures made to operate and maintain previously purchased capital expenses and can be used by most small businesses as a tax deduction.
For instance, let’s say the tour operating company from above needs to repair some of the bicycles they rent out to their customers to keep them in good working order. The maintenance costs associated with bicycle upkeep are necessary to operate the business; therefore, it’s considered a current expense and can be claimed on their tax return.
Other examples of current expenses include:
- property maintenance
- equipment repairs
- fleet vehicle service needs
- service to equipment, including electronic devices
Operating expenses are day-to-day expenses necessary for running your small business and are not related to the purchase or maintenance of a capital asset. Examples of operating expenses include:
- utilities including power, heat and water.
- licensing fees
Operating expenses can be fixed costs and also variable expenses that fluctuate. This cost category is where most of a small business’s tax deductions will be entered.
The following is our compiled list of the most common type of operating expenses small businesses can claim on their taxes each year. It must be noted that the list is not exhaustive and will not apply to every small business owner.
Most Common Operating Expense Tax Deductions for Canadian Small Business Owners:
- bookkeeping services
- advertising and marketing expenses
- business start-up costs
- software expenses
- contract labour
- electricity, heat and water
- employee wages and benefits
- freight and delivery
- interest expenses
- legal and professional services fees
- motor vehicle operating and maintenance expenses
- office supplies
- telephone, cell phone and internet expenses
- business travel expenses
- meals and entertainment expenses.
Small business owners need to be aware that some of these tax deductions may be subject to limits and are not applicable in all scenarios.
Home Office Deductions
Another small business deduction that many small business owners can take advantage of is the home office deduction. This tax break allows small business owners to deduct a portion of their household expenses (rent, mortgage interest, property taxes, insurance, heating, cooling and electricity) attributed to using the space in their home as an office.
In order to claim business use of home, you must meet one of the following:
- It is your principal place of business
- You use the space only to earn business income and you use it regularly to meet your clients, customers, or patients.
The percentage of household expenses a small business owner can claim for their home office deduction is based on the size of their home office in relation to the total size of their house.
The following is a list of common small business expenses that may be written off as part of your home office deduction:
- rent or mortgage interest
- property taxes
- heating, cooling and electricity costs
- Home internet access fees
It should be noted that the amount you can deduct for business-use-of-home expenses cannot be more than your net income from the business before you deduct these expenses. In other words, you cannot use these expenses to increase or create a business loss.
However, any unclaimed amounts can be claimed in your next fiscal year as long as you meet one of the two conditions above.
Canadian Small Business Tax Deductions – Our Final Word
Small business tax deductions in Canada can be a great help in reducing your taxable income. However, it is important to be aware of the specific expenses that qualify as tax deductions and the limitations.
This article has compiled a list of some of the most common small business tax deductions available in Canada. Make sure you consult this list, so you don’t miss out on any potential savings! For further information, or tax deduction advice, feel free to reach out to our expert bookkeeping team at Source Online Bookkeeping.