The thing about running your dream business is that you never actually get to do it; you’re too busy managing HR, legal matters – and especially taxes. It may seem like a drag, but every minute spent on gaining a better understanding of tax write-offs for a small business in Canada is a worthwhile investment.
“A lot of small businesses are operating on razor-thin margins, and every dollar counts,” says Jocelyn Rhindress, Senior Manager of Business Resources Initiatives with the Canadian Federation of Independent Business (CFIB).
The key to saving tax dollars, she says, are good record-keeping and understanding the Canada Revenue Agency (CRA) rules.
“And we always recommend dealing with a financial professional.”
Here are six important categories of tax write-offs for a small business in Canada, and some expert tips on claiming them correctly.
Input Tax Credits
As most business owners know, they can recover GST or HST paid on expenses related to the business, known as Input Tax Credits (ITCs). However, many people mistakenly claim the GST/HST amount again as an expense on their Income Tax Return, says CRA Liaison Officer Kiran Preeth Singh.
He offers the example of an individual in a province with a 13 per cent HST who buys $100 worth of stationery supplies. They should recover the $13 sales tax as an ITC, but it cannot be used again as an Income Tax deduction. “They have to separate the HST and report it on the HST form; the $100 is reported on the Income Tax Return,” he explains.
Fees and service charges
Bank service charges and fees charged by the many digital platforms that facilitate small-business operations, like point-of-sale devices and e-commerce sites, are all deductible.
“Merchant processing fees from your debit machine, any kind of annual fees on your business credit card, even ATM withdrawal fees: it comes down to keeping the records,” says Rhindress.
“Often, people don’t know how to account for these fees,” says Toronto-based tax expert Stefanie Ricchio, CPA. “Let’s say I issue an invoice for $1,000, the customer wants to pay digitally, and the system charges $5, so I collect $995.” It’s important to keep track of the net revenue and the processing fee separately in order to understand the true cost of doing business, she says.
Interest on mortgages and business loans
The CRA permits tax deductions for interest incurred on business loans and mortgages on real estate purchased by the business.
“If you’re incurring interest for the purpose of growing the business or acquiring property that’s going to be used in the business, those interest costs are deductible,” Ricchio says. “Businesses in the home can claim a certain proportion of mortgage interest, but you need to be meticulous about the allocation between business and the home.”
“It’s just the interest portion that’s tax-deductible, and it has to be directly tied to business activities,” Rhindress says. “This is where people often make a mistake.”
Business meals and entertainment
“One of the deductions that often gets missed is business meals and entertainment,” Rhindress says. “Only 50 per cent is deductible, and the primary purpose should be to discuss business or business activities. The recommendation is to keep records of what you discussed. Was it a prospect meeting? A networking event?”
There are exceptions: the CRA could decline a claim for 50 per cent of a $100 hamburger on the grounds that the cost was unreasonable. On the other hand, they may accept 100 per cent of the cost of staff meals under certain conditions.
Bad debt
You can deduct an account receivable that can’t be collected if it was previously reported as income for the year.
“The CRA might actually request proof of your collection efforts; make sure you have nice clear contracts and invoices. You could also use a demand letter or collection agency,” Rhindress says.
“It’s really about being able to demonstrate that you have tried,” says Ricchio. “If you get responses from your client, include them in your paper trail. This is where emails come in handy; don’t do things over the phone.”
Capital costs versus current expenses
The capital cost allowance (CCA) is for purchases with long-term benefits. These can’t be claimed in just one year. Instead, the cost is amortized over the lifetime of the purchase.
“Current expenses usually recur after a short period, so the cost is deducted in the year it was incurred; for example, the cost of painting the exterior of a wooden house,” says Singh. “The cost of putting vinyl siding on the outside of a wooden house is a capital expense, because it has a lasting benefit.”
The Business Development Bank of Canada (BDC) provides a simple guide to tax deductible business expenses on its website. For those seeking more detailed advice on tax deductions, the CRA offers small businesses and self-employed individuals a free Liaison Officer service and a small-business owners’ information line at 1-800-959-5525.
