Running a small business inevitably brings about its share of expenses. When used properly, the deduction of these expenses can substantially alleviate your tax burden. Understand the basic rules that every freelancer in Canada should know about tax deductions.
In Canada, any expense incurred for the purpose of earning income is deductible. In other words, any money you spend to operate or grow your business is tax-deductible. Some of the most common expenses include:
- Office supplies
- Taxes, fees, licences and dues
- Legal and accounting fees
- Bank fees, including interest on business-related loans
If you use your car in the course of your business, all of the expenses associated with the vehicle (such as gas, repairs and lease payments) are deductible. However, you need to keep precise records that show the percentage of the vehicle usage that is for business and the percentage that is for personal use.
Current expenditures and capital expenditures are deductible, but they are deductible in different ways. Current expenditures are made to purchase goods and services for immediate use in your business. Capital expenditures are for goods, such as equipment or buildings, which you have purchased for long-term use. As a rule, current expenditures are deductible in the year when you have incurred them, while capital expenditures are deductible in part in every year over their useful life. This process is known as capital cost allowance, also known as depreciation.
Home Office Expenses
If you use a dedicated portion of your home for your small business, such as a room that is designated as a home office, then you can deduct a reasonable percentage of the expenses associated with the home. You are responsible for determining what a reasonable amount is under the circumstances, but many taxpayers use a percentage that is equal to the proportion of the home office’s area in relation to the entire home – for example, 10%.
Admissible home office expenses include interest on mortgage payments, municipal and school taxes, insurance, energy, repairs, telephone and internet, and cleaning services and supplies.
Meals and Entertainment
Expenses that the Canada Revenue Agency classifies as meals and entertainment are subject to special rules. The maximum deduction that you are entitled to for food, beverages and entertainment expenses is 50% of either the amount you incur or an amount that is reasonable in the circumstances, whichever is less. The limit also applies to the cost of your meals when you travel or go to a convention, a conference or a similar event.
Membership dues and club fees, such as an annual membership to a golf club, are not deductible at all. It does not matter whether the membership is used to conduct business, since the Income Tax Act expressly states that no deduction for fees for membership in any club in which the main purpose “is to provide dining, recreational or sporting facilities for its members” is possible.