Ultimate List of CRA-approved Small Business Tax Deductions in Canada

Ultimate List of CRA-approved Small Business Tax Deductions in Canada

Ultimate List of CRA-approved Small Business Tax Deductions in Canada 2500 1440 Baranov CPA

Table of Contents

I. Introduction
II. Understanding Concepts Behind Small Business Tax Deductions

Personal Expenses
Business Start Date
Documentation Required
Capital Property Expenditures
Eligible Capital Property Expenditures
Inventory Costs
Operating Expenses
Prepaid Expenses
GST/HST Amounts

III. List of Operating Expenses for the Most Common Small Business Tax Deductions in Canada

Accounting and Legal Fees
Advertising Expenses
Bank Charges
Bad Debts
Business Startup Costs
Charitable Donations
Conference Costs
Contractor / Subcontractor Expenses
Cell Phone Charges
Education and Training
Employee Expenses – Salaried Employees
Employee Expenses – Salaries Paid to Children or Relatives
Gifts and Gift Cards to Clients
Gifts to Employees
Government Fees and Charges
Home Office / Business-use-of-home Expenses
Insurance Costs
Interest Expense
Meals and Entertainment
Medical Insurance Premiums
Office Expenses
Promotional Expenses
Professional / Trade / Commercial / Board / Association Dues
Self-employed Portion of Canada Pension Plan (CPP) Premiums
Software Subscriptions
Small Tools
Supplies
Travel
Vehicle Expenses
Uniforms

IV. List of Capital Expenses for the Most Common Small Business Tax Deductions in Canada

Class 1 (4%)
Class 8 (20%)
Class 10 (30%)
Class 10.1 (30%)
Class 12 (100%) – no half-year rule
Class 12 (100%) – half-year rule
Class 14 (allocated over useful life)
Class 14.1 (5%)
Class 16 (40%)
Class 50 (55%)

V. List of Non-Tax Deductible Transactions and Expenses for Small Businesses in Canada
VI. CRA References

I. Introduction

We have created this ultimate list of small business tax deductions that are allowed by the Canada Revenue Agency (CRA). While this list contains the vast majority of tax deductions used by small business owners, it is by no means an exhaustive list.

Generally, all reasonable small business expenses incurred to generate business revenue are tax deductible. Certain expenditures like golf club dues, gym membership, and life insurance premiums are explicitly excluded from the list of allowable tax deductions.

 

II. Understanding Concepts Behind Small Business Tax Deductions

small business tax deductions canada

Before we dive into the nuts and bolts of small business tax deductions, we should first understand some of the important concepts and all the different types of expenses that can be incurred by a small business owner.

Personal Expenses

Personal expenses are not tax deductible. To avoid cross-contamination of personal and business expenses, we recommend all small business owners to maintain a separate bank account and credit card for business purposes.

It may be the case that it is difficult to properly split personal and small business expenses for certain expenses (for example, cell phone or internet charges). In those cases, you will need to estimate the percentage of the business portion and apply it to the total amount of the expense.

For vehicle expenses specifically, the CRA requires small business owners to maintain a log for all business mileage that was incurred as part of revenue-generating activities.

Business Start Date

Before you can deduct any expenses from your income, you will need to be clear on the start date of your business. If it is not clearly established, the CRA can deem your business a hobby and disallow all business deductions.

In the majority of cases, the day when you start to have a reasonable expectation of profit is the day when you start running your business.

Documentation Required

The CRA requires small businesses to keep original invoices and receipts for a period of six (6) years after the end of tax year. Since you file your taxes after the end of the tax year, you will need to add another year on top of it. Our recommendation is to keep original receipts and invoices for a minimum period of seven (7) years.

Note that the CRA policy says that you need to keep original copies of receipts. That means if you received a physical copy of the document, then you need to store it in that format.

If you received an electronic copy, then this is what you can provide as a proof of purchase in case of an audit.

Note that receipts need to include detailed information about the purchase. Transaction slips, bank/credit card statements, written notes etc. do not count as supporting documentation for tax purposes.

Capital Property Expenditures

Capital property expenditures are assets and improvements that a small business purchased and will benefit the business over the period of longer than one (1) year.

Capital expenses cannot be fully deducted from revenues in the current tax year. Instead, the CRA established maximum percentages, called Capital Cost Allowance (CCA) rates that you can deduct from your income in a given year.

In addition to the CCA rate, there is also a half-year rule applicable to most capital expenditures. It means that you can only deduct half of the maximum allowable amount in the year of purchase.

CCA is also considered to be a discretionary tax deduction. Meaning, the amount you may deduct is up to the maximum allowable CCA rate. It can be useful if you have operating losses and don’t need to reduce your taxable income with additional tax depreciation.

Eligible Capital Property Expenditures

These capital expenditures are intangible in nature. Intangible assets that you acquired will be benefiting the business over the period of longer than one year. Examples include acquired goodwill, customer lists, trademarks, copyrights, franchise rights etc.

Inventory Costs

If your small business is buying and selling products, you can only write off the cost of the goods when you make a sale. Before the sale is made, the amounts need to be tracked on the inventory account.

After the sale is made the cost is allocated from an inventory to the cost of goods sold account.

Operating Expenses

Small business operating expenditures are deductible in a tax year in which they are incurred. They should be matched against revenues that they have generated and cannot be deducted from other tax periods.

The rule of thumb to determine the capital vs. operating nature of expense is to see whether the expenditure is benefiting the company for longer than one year.

In case of repairs and maintenance, one must see if the repairs are bringing the property to its original condition (operating expense) or improving the property beyond its original condition (capital expense).

Operating expenses can exceed revenues in a given year. In that case, the small business will incur a business loss for that tax year. Business losses can be carried up to 3 years back and up to 20 years forward.

Prepaid Expenses

Some expenses are prepaid in nature (like insurance or rent payments). Only a portion of those expenses is attributable to a specific tax year will be deductible (e.g. if you purchased business insurance on Jul 1 for 12 months, only half of it will be deductible for the current tax year).

GST/HST Amounts

Generally, GST/HST amounts collected and spent should be tracked separately from actual revenues and expenses. You will need to remit the net amount of GST/HST collected – the amount of GST/HST paid on your filing date. Most accounting software allows you to properly separate sales taxes from actual transactions.

There are multiple rules and exceptions on GST/HST sales taxes beyond the scope of the article. You will need to consult with a professional accountant to understand your unique situation.

 

III. List of Operating Expenses for the Most Common Small Business Tax Deductions in Canada

accountant small business tax deductions canada

Accounting and Legal Fees

Any accounting and legal fees incurred for business purposes are tax deductible by your small business. These services include:

  • Bookkeeping, payroll and tax preparation fees
  • Tax planning fees
  • Contract preparation and review fees
  • Litigation fees
  • Cost of tax software fees (if you are filing taxes yourself)

Any professional fees related to personal matters (such as wills, personal taxes, investment advice, small claim courts etc.) are not tax deductible from small business income.

Late filing fines, interest, and penalties imposed by the government are not tax deductible. Amounts spent on accountants and lawyers to object and appeal imposed penalties are tax deductible.

Advertising Expenses

In order to determine the appropriate percentage of the tax deduction for advertising expenses, you will need to know the medium that was used to advertise. Here are the most common providers:

  • Online Advertising Platforms (Facebook Ads, Google Ads) – 100% deductible
  • Radio and TV advertising advertised with Canadian broadcaster – 100% deductible
  • Print Advertising – 100% deductible, if more than 80% of printed content is dedicated to non-advertising content
  • Print Advertising – 50% deductible, if less than 80% of printed content is dedicated to non-advertising content

Radio and TV commercials advertised with foreign broadcasters are not tax deductible.

Bank Charges

Any bank and credit card fees charged on business accounts are tax deductible. That includes:

  • ATM fees
  • Monthly bank charges
  • Transaction fees
  • Credit card annual fees
  • Currency conversion fees

Bad Debts

You can write-off unpaid invoices from your income if you already included them in your revenues in the current or prior years. Later on, if you partially or fully collect the bad debt, you will need to include it that year’s income.

Business Startup Costs

Incorporation and legal expenses amounting to less than $3,000 are tax deductible in the first year of business. Any other operating business expenses that relate to business startup costs are also deductible in the current year.

However, make sure you clearly establish the business start date to deduct business startup costs. Costs from prior periods before the business has started are not allowable tax deductions.

Charitable Donations

You can deduct charitable donations to registered charities for up to 75% of net income. Unused donations can be carried forward for up to five (5) tax years.

Conference Costs

Small business owners are allowed to deduct costs of up to two (2) conferences per year.

Contractor / Subcontractor Expenses

Contractor expenses related to small business are tax deductible.

You will need to obtain an invoice from your contractors and subcontractors before you make a payment. At the very minimum the invoice should state the name, address, itemized list, price and total cost of the expenses claimed.

Make sure the individuals you work with are indeed contractors and not employees. You can read our guidance on employee vs. self-employed contractor determination for further information.

Contractors should also charge HST if their taxable supplies in the last four consecutive quarters exceeded $30,000. In that case, invoices from the contractor should clearly show their business number and the amount of HST charged on top of the invoiced amount.

Cell Phone Charges

Cell phone charges should be prorated based on the business use portion. For example, if your monthly bill is $100 and you estimate that 70% of the time you use your cell phone for business purposes, then you can deduct $70 from your small business income.

If you have a separate phone that you use strictly for business purposes, then 100% of that phone bill is tax deductible.

Note that the cost of purchasing a new cell phone is added to Class 50 and is depreciated at 55%.

Education and Training

Education and training required to keep professional designation or trade certification are tax deductible in a current operating year.

Long-term education programs like specialist certifications, additional degree courses and seminars with periodic attendance should be capitalized to Class 14 and deducted at 5% annually.

Employee Expenses – Salaried Employees

Employee expenses and related-to-employees expenses are fully tax deductible. These include:

  • Salaries, wages, and bonuses
  • Payroll Costs and Taxes (Employer Portion of Canada Pension Plan (CPP) / Employment Insurance (EI), Workers Compensation Board Insurance (WSIB), Vacation Pay, Statutory Pay)
  • Training Costs
  • Health and Dental Benefits (when provided to all employees)
  • Payroll preparation and filing fees

Employee Expenses – Salaries Paid to Children or Relatives

The salaries paid to your relatives are tax deductible as long as (i) you actually pay the salary (ii) the work is necessary to earn business income (iii) the salary is reasonable compared to the relative’s age and experience.

These arrangements must be properly documented. In many cases, the CRA may ask for a job description or an employment contract to substantiate the expense.

Another note is that in case of a salary you will need to submit source deductions to the CRA by the 15th of the next month. The party receiving the payment will need to be issued a T4 and properly declare income on his/her tax return.

If your total payments were less than $500 in a calendar year, then you don’t need to deduct source deductions and file any payroll reports with the CRA.

Gifts and Gift Cards to Clients

Reasonable amounts spent on gifts and gift cards are tax deductible. You should be prepared to provide a receipt and client’s name for each gift you make. Unreasonably high amounts of gifts and gift cards may be disallowed and penalized by the CRA

Note that meals and entertainment gift cards are only 50% deductible.

Gifts to Employees

You may deduct up to 2 non-cash gifts valued at $500 per employee per year. Cash gifts must be included in employee’s income.

Government Fees and Charges

You can deduct any annual fees and business taxes required by the government to run your business. These deductions include:

  • Business taxes
  • Licensing fees
  • Registration fees
  • Annual dues
  • Permit fees
  • Property taxes (if you own the office building)

Government fines, interest, and penalties imposed by federal, provincial and municipal governments are not tax deductible.

Home Office / Business-use-of-home Expenses

The Canada Revenue Agency allows to deduct home office expenses if one of the two conditions is met:

  1. You must use your home office for more than 50% of the time when you do your work
  2. The workspace is exclusively used to earn business income AND you must regularly use it to meet clients, customers, or patients

You can deduct a percentage of area used exclusively for business purposes. For example, if you use 200 sq. ft. out 800 sq. ft of total finished space, then you can deduct 25% of the related home office expenses from your small business income. The expenses that you can claim are:

  • Rent
  • Utilities
  • Property taxes
  • Maintenance fees
  • Home insurance
  • Phone / Internet (if you used it for business purposes)
  • Repairs and maintenance (related to workspace only)
  • Cleaning fees or cleaning materials (a portion that relates to workspace)

Our guidance is not to exceed 20-25% of your total finished area with the portion of home office deduction.

Special assessment fees charged by some condominiums are not tax deductible. Capital expenditures (like furniture and laptops) cannot be directly deducted in the current tax year (see the above notes on Capital Cost Allowance).

Also, you cannot deduct home office expenses when you are already renting an office space, even though you may still be working from home or meeting some clients at home.

You cannot create a business loss with the home business deduction. However, unused home office expenses can be carried for up to one (1) year.

Insurance Costs

Business-related insurance premiums are tax deductible. These include:

  • Professional Liability / Errors and Omission Insurance
  • General Liability Insurance
  • Business interruption insurance

With regards to other types of insurance coverages that include an element of personal benefit (life insurance, disability insurance, medical insurance etc.), they are generally not tax deductible. However, they can be turned into tax deductions provided certain conditions are met.

The rules for these types of insurance deductions are not straightforward. One should consult with a professional accountant before deducting these expenses from business income.

Interest Expense

You can deduct interest expenses on funds you borrowed to acquire a business property or run business operations. There are limits on the amount of interest you can deduct on money borrowed to purchase a passenger vehicle or vacant land.

Meals and Entertainment

Generally, meals and entertainment are 50% tax deductible for your small business. These include:

  • Client meals and entertainment (restaurants, hockey/ball games, theatre tickets etc.)
  • Travel meals and entertainment

The 50% limits do not apply to:

  • Meals and food provided to customers in the regular course of business (e.g. restaurant, hotel, catering etc.)
  • Meals and entertainment expenses billed back to clients
  • Meals and entertainment for office events (limit of up to 6 parties per year)
  • Meals and entertainment for the benefit of fundraising for a registered charity
  • Meals for employees located in a remote temporary location on a construction site

Exceptions:

  • Long-haul truck drivers away for at least 160 km, for at least 24 hours – 80% deductible
  • Self-employed bicycle couriers/rickshaw drivers – up to $17.50 per day. Logs and dispatch documents must be kept as supporting documentation

Note that if you left a tip and paid with your card, please keep copies of both the receipt and the transaction record slip showing the additional amount paid for tips.

In addition, some CRA auditors require putting client’s name on the receipt to support the business portion of the claim. You might want to start putting on your receipts to avoid potential questions from the CRA.

Medical Insurance Premiums

In order for medical insurance contributions to become deductible expenses, they need to qualify as Private Health Service Plan (PHSP) premiums. The rules are also quite complex on this deduction with several factors that need to be taken into account (type of plan, number of arm’s lengths employees, business structure etc.).

You will need to speak to a professional accountant about your unique situation.

Office Expenses

Expenses that relate to running an office are fully tax deductible. Included are:

  • Rent / Lease charges
  • Boardroom and photocopier rental fees
  • Utilities
  • Phone / Internet
  • Cleaning fees
  • Security alarm fees

Do not include furniture and equipment in this category. These are capital expenditures. They should be allocated to individual classes and depreciated over the useful life.

Promotional Expenses

Expenses paid for promoting your business are tax deductible. These expenses include:

  • Trade show costs
  • Printed materials (catalogs, flyers, business cards, brochures, thank you cards etc.)
  • Referral and commission fees to individuals and businesses
  • Commission rebates (for real estate professionals)
  • Car advertisement (only the cost of painting and application)

Professional / Trade / Commercial / Board / Association Dues

If you are paying your annual professional association dues, they are fully tax deductible from your business income.

Self-employed Portion of Canada Pension Plan (CPP) Premiums

If you are self-employed under the sole-proprietorship business structure (no corporation), then you will have to pay double the amount of CPP. One for your own portion and one for the business portion. The business portion of CPP becomes tax deductible for the self-employed business owner. The personal portion becomes a tax credit on the personal tax return.

The minimum threshold for CPP is $3,500. The maximum limits and actual percentages are changing every year.

Software Subscriptions

Any monthly app subscription that you use for your small business is tax deductible. Hosting and website expenses are also tax deductible. The amounts that are charged in USD and converted to CAD on your credit card are deductible at the converted CAD value.

Original receipts and invoices must be kept to support the converted CAD amount claimed for the tax deduction.

Small Tools

Small tools under $500 are tax deductible. Examples include wrenches, saws, dies, drills etc.

Supplies

The cost of any supplies required to run the business is tax deductible (e.g. cleaning supplies, office supplies, plumbing supplies for a plumber, medical supplies for a doctor’s office etc.).

Travel

Travel expenses incurred for purposes of earning business income are tax deductible 100%.

  • Transportation costs (air / train / subway / bus fares / car rentals)
  • Hotel accommodation

Note that travel meals, including meals while you are at a hotel or on a plane, are deductible at 50% rate.

Vehicle Expenses

A reasonable business portion of vehicle expenses is tax deductible. To calculate the percentage of the deduction, you should track business mileage in physical or electronic logs. You will also need to note the total mileage your vehicle drove during the year.

For example, if you drove 10,000 km in a tax year and 4,000 km were for business purposes, then you can deduct 40% of your vehicle expenses.

  • Fuel
  • Repairs and Maintenance
  • Insurance
  • License and Registration
  • Toll road charges
  • Depreciation (Wear & Tear)
  • Lease payments (if leased) up to $800 (plus taxes) per month
  • Lease down payment (pro-rated and deducted over the life of the lease)
  • Interest on financing – up to $300 per month

On average small businesses are writing off 40-60% of vehicle expenses. However, the number will vary from business to business and industry to industry. In any case, make sure you keep copies of those logs available for the CRA to see in case of an audit.

Please note that mileage from home to your office and back is not considered to be business mileage unless your home office is the primary place of business. On the opposite, mileage from office to client sites is considered a business expense.

There are also additional restrictions if you use your car to drive to your rental properties.

Uniforms

If you bought uniforms or t-shirts with the company logo for everyone in the company, then these expenses are tax deductible.

What is not tax deductible are custom-tailored suits and any garment expenditures for the personal benefit of the small business owner.

 

IV. List of Capital Expenses for the Most Common Small Business Tax Deductions in Canada

accountant small business tax deductions cpa canada

As mentioned previously, most capital expenses that will benefit the small business for longer than a year cannot be fully deducted in the year of purchase. Instead, they should be properly tracked and depreciated against the taxable income according to specific percentages established by the CRA.

The allowed Capital Cost Allowance (CCA) percentage will depend on the class assigned to the type of the property. If you can’t find the property on the list, then you will need to put it into the class that closely matches the nature of the capital property.

Class 1 (4%)

  • Buildings
  • Lighting Fixtures
  • Plumbing
  • Sprinkler Systems
  • Heating Equipment
  • HVAC
  • Elevators

Class 8 (20%)

  • Furniture
  • Appliances
  • Tools costing $500 or more per tool
  • Fixtures
  • Outdoor Signs
  • Refrigeration Equipment
  • Photocopiers and fax machines
  • Telephone equipment

Class 10 (30%)

  • Computer Hardware (electronic frameworks and infrastructure equipment etc.)
  • Systems software
  • Data processing equipment
  • Passenger motor vehicles costing less than $30,000

Class 10.1 (30%)

  • Passenger motor vehicles costing more than $30,000

Class 12 (100%) – no half-year rule – direct tax deduction

  • Tools costing less than $500
  • China, cutlery, linen
  • Uniforms

Class 12 (100%) – half-year rule applies

  • Dies
  • Jigs
  • Moulds, patterns, lasts
  • Computer software

Class 14 (allocated over the established life of the property)

  • Patents
  • Franchises
  • Concessions
  • Licenses

Class 14.1 (5%)

  • Goodwill
  • Customer Lists
  • Franchises, concessions, licenses acquired for an unlimited period
  • Cost of education directly benefiting the small business owner over longer periods of time (specialty certifications for a doctor/accountant/lawyer; extensive professional development etc.)

Class 16 (40%)

  • Taxi vehicles
  • Daily car rentals
  • Pinball machines
  • Freight trucks above 12 tonnes

Class 50 (55%)

  • Smart Phones
  • Computers and laptops

 

V. List of Non-Tax Deductible Transactions and Expenses for Small Businesses in Canada

accountant laptop calculating tax deductions for small business

Below is the list of most non-tax deductible expenses either explicitly prohibited by the Income Tax Act (ITA) or frequently misinterpreted by small business owners.

  • Club Membership Dues for dining, recreation and sporting activities
  • Expenses to take clients to amusement parks and tourist attractions
  • Any other excessive client entertainment amounts (e.g. strip club expenses, escort services, vacation tickets etc.)
  • Any personal expenses that are not directly attributable to the generation of revenues (e.g. gym memberships, cost of dog walking, adult site subscriptions, cost of cigarettes & alcohol)
  • Personal portion of expenses from mixed-use resources (e.g. vehicle, cell phone charges, home office)
  • Government fines, levies, interest, and penalties. For example, parking and speeding tickets, interest and penalties on unpaid taxes, fines for code violations etc.
  • Dividends (they are paid out of after-tax income)
  • Direct cash withdrawals from the business
  • Prepaid expenses (need to be allocated to specific tax periods)
  • Custom-tailored suits
  • Personal life insurance premiums (unless the insurance is for key operational figure and the beneficiary is the company)
  • Disability insurance premiums
  • Value of your own labour if you are doing repairs and maintenance yourself
  • Deducting monthly advertising fees for driving a car with printed advertisements
  • Any portion of business expenses that the CRA deems as overly excessive or unreasonable

 

VI. CRA References

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance/classes-depreciable-property.html

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses.html

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses/current-capital-expenses.html

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4022/general-information-gst-hst-registrants.html

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4070/information-canadian-small-businesses-table-contents.html

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from an accounting professional. Baranov CPA Professional Corporation will not be held liable for any consequences that arise from the usage of the information provided on this page.