Canadian taxpayers can decrease their tax obligations by claiming business expenses when they file. When looking to make deductions it is important to remember that the Canadian Revenue Agency (CRA) allows any “reasonable” business expenses.
According to the CRA, business expenses are:
"...certain costs that are reasonable for a particular type of business, and that are incurred for the purposes of earning income. Business expenses can be deducted for tax purposes. Personal, living, or other expenses not related to the business cannot be deducted for tax purposes.”
As a business professional, it’s important to know how to distinguish between your business expenses and your personal expenses throughout the year, especially if you are a home-based business. Keeping a separate business bank account and following proper accounting practices will help you keep track of expenses and separate them, but what else counts as a claimable business expense? Most business professionals know the obvious expenses that qualify as “reasonable” but there are a few deductibles that may surprise you.
Here are three surprising business tax deductions that you may not have realized were deductible expenses.
Business Promotions
In Canada, business promotion activities are considered legitimate income tax deductions! As a partner or sole proprietor of a Canadian business, these expenses can be claimed on the Statement of Business or Professional Activities form (also known as a T2125 form) that you file alongside your income tax return (T1). A corporation can claim these business expenses on the corporate income tax form (T2).
What Business Promotion Activities Qualify?
Almost all expenses related to business promotions are deductible, including:
- Taking clients out for lunch and dinner (50% is claimable).
- Items that are given to clients for free such as custom mugs, hats, t-shirts, etc.
- Seminars and presentations (50% of the catering is claimable).
- Creating flyers, brochures, and business cards.
- Sponsoring non-profit organizations or charitable events (as long as your business gets advertising or some other type of promotion at the organization or event).
- Paint jobs on trucks that promote the business.
- Tickets to sports games for clients (50% is claimable).
- Bringing a box of doughnuts to the office.
What’s the catch?
Be careful when you advertise because the CRA is pretty particular about who you pay for your promotions. Almost all print and television advertising is 100% claimable as long as they are done through a Canadian-based company. Using an international broadcasting company means you will not be able to claim any television ads, and in print, the ads must be distributed by a Canadian media company and the paid ad must include 80% actual content. Only 20% of your ad can be an ad. If 50% is content and 50% is advertising, then 50% can be claimed on your taxes.
The exception is online advertising! They are not considered print or broadcasting and are fully deductible, including website registration and hosting fees.
Internet Expenses
The internet has become a requirement in every workplace. From sending emails in a basic office to entire companies dedicated to selling internet-related software, the internet has become the ultimate tool for workers of all walks of life. So knowing that there are internet-related expenses that you can claim on your taxes is a relief for many companies.
What Internet-Related Expenses Qualify?
Many types of software and services are deductible, including:
- Cloud computing service provider fees (online data storage and computing power).
- Internet Service Provider (ISP) fees (i.e. your wifi or internet connection).
- Business software and applications (i.e. Microsoft Office or Accounting programs).
What’s the catch?
There is no catch as long as you are claiming these expenses for your principal place of business. If you are working from home you can only claim a portion of your internet-related expenses. 100% of cloud computing services and business software expenses can be claimed on your income taxes if you work from home (for both employees and business owners). As for your ISP fees, you can only claim your monthly home internet access fee, any connection or leasing fees are not claimable.
Expert Advice
Sometimes even the best of the best need a little advice. Hiring a consultant is a great way to reevaluate your business and build a better growth strategy, not only will they provide expert insight but they are also a deductible expense!
What Types of Experts Qualify?
The following professional services are 100% deductible:
- Freelance work, such as writers or accountants.
- One-time services, such as a lawyer creating an official document for you.
- Agency work, such as having a social media agency manage your accounts for you.
- Any other expert service that will bill you for their time.
What’s the catch?
In order to be considered a tax-deductible expense, the professional must be working as their own separate entity. You cannot claim your direct employee's salaries as consultant fees. Any claimable expert services or advice must bill you for their services, provide a receipt, and cannot be considered an employee by the company to any degree.
Work from Home?
Bonus: if you are an employee working from home you can deduct a portion of your household fees on your income taxes. What fees qualify? It depends on where you live and how your fees are charged.
- Own a condominium? You can claim your utilities, but only if they are charged to you as a condo fee. If you pay utilities directly you cannot claim them.
- Rent your home or apartment? You can claim a reasonable portion of your rent related to your workspace.
- Own your home? You can claim a portion of your mortgage interest that would cover your workspace.
- Any homeowner with expenses that could relate to both the workspace and the home can claim the percentage of expenses related to the workspace. (i.e. a portion of repairs to your furnace or household cleaning products can be claimed).
- If an expense is 100% related to the workspace (i.e. a single lightbulb for your home office) you can claim 100% of the amount.
Not Sure about an Expense?
If you ever have doubts about the tax deduction potential of a particular business expense, it is always a good idea to check with your accountant or the CRA. Being overly aggressive with your deductions is the best way to attract the CRA’s attention and potentially get your business audited, especially for sole proprietorships, construction, and foodservice businesses.
You can always visit the Government of Canada website for detailed information on your taxes, don’t be afraid to take a look at some of the help resources they offer businesses.
