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Claiming Business Expenses on your Income Taxes

If you own a business, you likely know that you are able to deduct business expenses for tax purposes.

According to the Canada Revenue Agency (CRA), you can deduct any “reasonable expense” that you paid or will have to pay in order to earn business income. But what is considered a “reasonable expense?”

Several expenses may be acceptable deductions, including but not limited to:

  • Administrative fees
  • Advertising directed at a Canadian market
  • Bad debts
  • Business start-up costs
  • Fuel costs
  • Home office expenses
  • Insurance charges
  • Maintenance and repairs
  • Meals and entertainment
  • Office Expenses
  • Supplies
  • Travel
  • And other expenses

In general, if the expense was paid in an effort to earn business income, you may deduct it. That said, there are restrictions on certain expenses.

Remember that you can only deduct the business part of an expense. You cannot deduct personal expenses. For example, if you purchased a vehicle that you use for both personal and business purposes, you will need to make sure that you only claim the portion required for business use. Keeping track of this fact, and properly separating business expenses from personal ones, requires good record-keeping.

The Importance of Keeping Records

All business expenses must be supported by documentation. This means that you’ll need to have receipts or invoices to back up your claims. Many small business owners neglect to keep proper books and records. It’s easy to see why. Running a small business is complicated and there are a lot of moving parts to pay attention to at any given time. Therefore, it’s easy to see how you could lose track of receipts.

Of course, the CRA doesn’t take this as an excuse. If you don’t have correct documentation, the CRA may decide to reduce the expenses that you deducted, or even reject them entirely. This can be costly. Remember, while you don’t need to send your receipts and documents when you file your taxes, you’re still expected to keep them and provide them if requested. Also, a bank statement or a credit card statement does not count as a valid receipt. All this proves what that you made a purchase. It doesn’t specify enough information to satisfy the CRA.

One exception to this rule about documentation is when it comes to meals and entertainment expenses. You can deduct 50% of applicable meals as a business expense. If you keep receipts, you can deduct 50% of the actual amount spent. However, you can also use a simplified method where you can claim 50% of a flat rate of $17 per meal, to a maximum of $51 per day. To claim higher expenses, you will need receipts. You will also need to keep records of business travel, regardless of which method you are using.

Small businesses and self-employed individuals are audited by the CRA much more often than other taxpayers. This is another reason why keeping detailed records is important. You will need to prove your expenses to the CRA and also show that you are accurately keeping track of business expenses and separating them from personal expenses. If the CRA has contacted you regarding your expenses, you should speak to the professionals at Tax Solutions Canada today. Please contact us.