(Originally posted on July 29, 2015)

 

Allowable Business Expenses

One of the first questions asked by a new business owner is “What can I claim as business expenses?”

Under the Income Tax Act, there is no true definition of what constitutes an allowable deduction against business or professional income. Essentially, any expense incurred directly related to the operation of your business or in direct relation to earning professional income is an allowable deduction. It would be impossible to list every deduction allowed in computing business income, because in theory, any expense incurred for the purpose of earning income is deductible. There are certain restrictions and exceptions to this guideline.

 

In assessing whether expenses are deductible, first apply the two basic requirements of a deductible expense:

  • The expenses must be incurred for the purpose of earning income and;
  • The expense must be reasonable in the circumstance

There are some common items that are regularly deductible, such as:

  • Rent for office space
  • Telephones
  • Office Supplies
  • Wages & Benefits
  • Insurance
  • Business Memberships
  • Internet Access
  • Advertising
  • Promotional Items
  • Business Cards/Letterhead


But what about less than common expenses such as dog food?


If you operate a pet store, dog food would be a reasonable expense. What if you own a car repair facility though? Can you justify the expenses? If the dog were on-site 24 hours per day, and free to roam the building after hours, you could argue that this is a guard dog for the purposes of protecting your business, therefore, food, vet bills and related expenses could be claimed.

In respect to automobile expenses, contrary to popular belief, you cannot claim 100% of your personal vehicle as a business expense. The personal use portion of automobile expenses must be calculated as they are not deductible. This is generally done with the assistance of a mileage log. In fact, if you do not have a mileage log to support your claim for automobile expenses, CRA can and will likely deny your claim. All expenses are then pro-rated between business and personal use. Typical vehicle related expenses can include:

  • Licence and registration fees
  • Fuel & Oil
  • Repairs & Maintenance
  • Insurance
  • Loan Interest
  • Lease costs
  • Depreciation

Most new businesses start from a home office, as such, there are a number of items that you can claim based upon the business/personal use portions, of household related expenses; these items generally include:

  • Utilities
  • Insurance
  • Maintenance
  • Mortgage Interest
  • Property Taxes

In similar fashion to automobile expenses, you have to prorate the costs based upon the amount of space the office occupies (generally using square footage) vs. the entire house. For example, if your house is 2,000 square feet and the office occupies 100 sq. ft., you would be entitled to a deduction of 5% of the total household costs; of course, this is subject to 2 conditions:

The space must be used solely for the purposes of earning business income; and
The space must be used as your principal place of business.

A fairly recent change to the Income Tax Act has added another great business deduction: Premiums paid for private health insurance plans are now 100% tax deductible, whereas they used to only factor into the medical expense credit. This is a great means of giving yourself and your family ‘benefits’ with before tax dollars.

Before you make any decisions relating to claims for expenses, it is best to consult an accounting professional to be certain that your claim will stand up to CRA scrutiny. The onus is on you, the taxpayer, to justify the reasonableness of any deductions.