Every small business has a smattering of expenses to account for and budget for. Rent, utility bills, and office supplies are common and, when totalled together, aren’t insignificant.\r\n \r\n\r\n \r\nFor example, in 2019, real estate agents spent 1.3 per cent of their total revenue on rent and another 1.3 per cent on utility bills. These percentages may appear small, but when every dollar counts, it’s important to keep as much of your revenue as possible. As you scale, those small percentages come to represent not-so-small dollar amounts.\r\n \r\n\r\n \r\nFortunately, many small business expenses may be claimed and written off as tax deductions. The Canada Revenue Agency (CRA) allows businesses to deduct business expenses when they incur to earn income. \r\n \r\n\r\n \r\nBut before you reduce your tax obligation, it’s important to understand what qualifies as a deductible business expense and how to record and claim business expenses in Canada.\r\n \r\n\r\n \r\nHow to determine if a business expense is tax deductible\r\n \r\n\r\n \r\nIn Canada, business expenses are only tax deductible when the expense is reasonable for your line of work. Reasonable business expenses vary from business to business, as what’s reasonable in one industry differs from that of another.\r\n \r\n\r\n \r\nGenerally, business expenses are deemed reasonable if they’re appropriate to your business in both type and cost. For example, you may deduct the cost of your telephone, like your Telus bill, if the expense was incurred for business purposes.\r\n \r\n\r\n \r\nIn contrast, the owner of an antique store likely could not write off the purchase of a brand-new motorcycle.\r\n \r\n\r\n \r\nDetermining if an expense is reasonable is relatively straightforward. If it’s an expense intended entirely for business purposes, such as the office electricity bill, it would be deemed a business expense. However, what happens if you use a single cell phone for both business and personal use?\r\n \r\n\r\n \r\nIn a case like this, you could only claim a fraction of the expense—the portion of expenses incurred for business purposes. If you use your phone for business 20 per cent of the time, 20 per cent of your phone bill would be tax deductible. The same applies to the purchase of the hardware. When possible, it’s advisable you put your utility accounts in the company's name, rather than your own. Check with your accounting professional before making these kinds of capital expenditures. \r\n \r\n\r\n \r\nKeeping track of your business expenses\r\n \r\n\r\n \r\nThe CRA expects entrepreneurs and small businesses to document and track business expenses. Any business expense that you intend to claim as a tax deduction must be supported by documentation, including:\r\n \r\n\r\n\r\n\r\nSales invoices\r\nPurchase and sales agreements\r\nReceipts\r\nVouchers\r\nCancelled cheques\r\n\r\n\r\n\r\n \r\nThere are two exceptions to the documentation rule: meal and vehicle expenses. For these expenses, you can use a simplified method. \r\n \r\n\r\n \r\nMeal expenses are tax deductible based on a flat rate up to a maximum daily allowance. If you opt to deduct the actual cost of the meal (the detailed method), you’re required to treat it like any other business expense, including recording the transaction and keeping relevant documentation.\r\n \r\n\r\n \r\nSimilarly, you may use either a simplified or detailed method to claim vehicle expenses as tax deductible. The simplified method uses a flat cents-per-kilometre rate to reduce your tax obligation, though you will need to keep a log of work-related mileage.\r\n \r\n\r\n \r\nIt’s a good idea to use accounting or bookkeeping software to record your business transactions and expenses. Many apps include tools to store, sort, and organize your receipts, invoices, and other documentation.\r\n \r\n\r\n \r\nIf you’re not the DIY sort, consider hiring a bookkeeper to maintain your books and ensure you’re accurately tracking expenses. Professional bookkeepers specialize in managing business transactions and help ensure your small business is financially healthy—and not drawing the ire of the CRA.\r\n \r\n\r\n \r\nWhat is a tax deductible business expense?\r\n \r\n\r\n \r\nQualifying business expenses that may be claimed as tax deductions include, but not limited to:\r\n \r\n\r\n \r\nAdvertising (in Canadian newspapers, on Canadian television, and/or on Canadian radio)\r\n \r\n\r\n\r\n\r\nThe entire expense is deductible if your advertising is directed to a Canadian market and the original editorial content is 80 per cent or more of a periodical’s non-advertising content\r\nDeduction is capped at 50 per cent if your advertising is directed to a Canadian market and the original editorial content is less than 80 per cent of a periodical’s total non-advertising content\r\n\r\n\r\n\r\n \r\nBad Debt\r\n \r\n\r\n\r\n\r\nYou cannot collect money owed to you in the current year and have already included the receivable in income\r\n\r\n\r\n\r\n \r\nBusiness Start-up Costs\r\n \r\n\r\n\r\n\r\nMust have started your business in the fiscal period in which the expense is incurred\r\nMust have a clear launch date for the business\r\n\r\n\r\n\r\n \r\nBusiness Tax, Fees, Licenses, and Dues\r\n \r\n\r\n\r\n\r\nAnnual license fees are tax deductible\r\nAnnual dues or fees for belonging to professional organizations may be deducted, unless the organization’s main purpose is dining, recreation, or sporting\r\nThe cost of subscriptions to professional publications may be deducted\r\nSome business taxes are deductible\r\n\r\n\r\n\r\n \r\nBusiness-use-of-home Expenses\r\n \r\n\r\n\r\n\r\nbusiness-related purposes may be deducted if workspace in your home is your primary place of business, or such space is only used for business-related purposes and to meet with clients, customers, or patients\r\nThe total deduction must be proportionate to the amount of space dedicated to your business (e.g. 25 sq. m. office in a 250 sq. m. home = 10 per cent max deduction of qualifying expenses)\r\n\r\n\r\n\r\n \r\nCapital Cost Allowance\r\n \r\n\r\n\r\n\r\nA portion of the cost of depreciable property, such as buildings, furniture, or equipment, may be deducted over time\r\n\r\n\r\n\r\n \r\nDelivery, Freight, and Express\r\n \r\n\r\n\r\n\r\nDeductible\r\n\r\n\r\n\r\n \r\nFuel (except for vehicles)\r\n \r\n\r\n\r\n\r\nDeductible\r\nFuel related to business use in your home must be claimed as a business-use-of-home expense\r\n\r\n\r\n\r\n \r\nInsurance\r\n \r\n\r\n\r\n\r\nCommercial insurance premiums are deductible\r\nVehicle-related premiums must be claimed as motor vehicle expenses\r\nPremiums related to business use in your home must be claimed as business-use-of-home expenses\r\nA portion of life insurance premiums may only be claimed if the policy was used as collateral for a business-related loan\r\n\r\n\r\n\r\n \r\nInterest and Bank Fees\r\n \r\n\r\n\r\n\r\nInterest incurred on borrowed money is deductible if the loan was acquired for business purposes\r\nCertain loans have limitations\r\n\r\n\r\n\r\n \r\nLegal, Accounting, and Professional Fees\r\n \r\n\r\n\r\n\r\nFees incurred for professional advice, services, or consulting are deductible\r\nIncome tax and GST/HST preparation and filing fees are deductible\r\nFees incurred to buy capital property are not deductible\r\n\r\n\r\n\r\n \r\nMaintenance and Repairs\r\n \r\n\r\n\r\n\r\nThe cost of labour and materials for repairs done to property used for purposes of business income is deductible\r\nThe value of your own labour, cost for repairs of a capital nature, or costs reimbursed by an insurance company are not deductible\r\nRepairs related to business use of your home must be claimed as a business-use-of-home expense\r\n\r\n\r\n\r\n \r\nMeals and Entertainment\r\n \r\n\r\n\r\n\r\nFifty per cent of the lesser of either the amount incurred or a reasonable amount may be deducted\r\nSpecial rules may apply when traveling\r\n\r\n\r\n\r\n \r\nOffice Expenses\r\n \r\n\r\n\r\n\r\nSmall items, such as pens, pencils, and paperclips, may be deducted\r\nCalculators, furniture, and items deemed capital items may not be deducted\r\n\r\n\r\n\r\n \r\nPrepaid expenses\r\n \r\n\r\n\r\n\r\nMay be deducted in the year or years in which you receive the benefit if you are using the accrual method of accounting\r\nNon-inventory related prepaid expenses may not be deducted if: you are using the cash method of accounting OR it has been two or more years since paying the expense\r\n\r\n\r\n\r\n \r\nProperty Taxes\r\n \r\n\r\n\r\n\r\nMay be deducted for property-related to your business\r\nProperty taxes related to business use of your home must be claimed as a business-use-of-home expense\r\n\r\n\r\n\r\n \r\nRent\r\n \r\n\r\n\r\n\r\nMay be deducted for rents incurred for business use\r\nRent related to business use of your home must be claimed as a business-use-of-home expense\r\n\r\n\r\n\r\n \r\nSalaries, Wages, and Benefits\r\n \r\n\r\n\r\n\r\nGross salaries and other benefits paid to employees may be deducted, except for salaries or drawings paid to any owners or partners\r\n\r\n\r\n\r\n \r\nSupplies\r\n \r\n\r\n\r\n\r\nThe cost of items used indirectly to provide goods or services may be deducted\r\n\r\n\r\n\r\n \r\nTelephone and Utilities\r\n \r\n\r\n\r\n\r\nPhone and utility costs incurred to earn income are deductible\r\nUtility expenses incurred at your home for business-related purposes must be claimed as business-use-of-home expenses\r\nCell phone bills, such as your Telus bill, can also be tracked through your business-use-of home expenses when you are paying for the bill personally\r\n\r\n\r\n\r\n \r\nTravel\r\n \r\n\r\n\r\n\r\nThe cost of travel expenses incurred for the sake of business or professional-related purposes may be deducted\r\n\r\n\r\n\r\n \r\n \r\n \r\n\r\n \r\nBefore you can claim an expense as a deduction, your business must have a reasonable expectation of profit. In other words, you may not be able to claim an expense as a deduction if the CRA has reason to suspect your activities may never be profitable.\r\n \r\n\r\n \r\nFor example, income earned from a hobby means you might not be eligible to claim expenses as tax deductions since you never intend it to be profitable. However, you should speak to an accountant to see if it would be wise to have your hobby classified as a business, and therefore eligible to claim tax deductions.\r\n \r\n\r\n \r\nBusinesses that aren’t yet turning a profit may have to show the CRA when they expect to be profitable. In this case, you may be able to successfully claim a deduction even if your business hasn’t yet earned a profit.\r\n \r\n\r\n \r\nWhy should you claim business expenses in Canada?\r\n \r\n\r\n \r\nReducing your tax obligations by deducting qualifying business expenses keeps more money in your business bank account—something that’s important at every stage of your business. That extra money could be reinvested into your business to encourage continued growth, used to benefit your community, or to improve the lives of your employees and family.\r\n \r\n\r\n \r\nWhatever your reasoning, tracking and claiming business expenses makes for wiser financial decisions. In doing so, you’re also continually assessing and supporting your business’s financial stability.\r\n \r\n\r\n \r\nWhether you choose the DIY route with bookkeeping software or decide to work with a bookkeeper or accountant, always remember to accurately record business transactions and save, sort, and file any accompanying documentation or proof.\r\n \r\n\r\n \r\nWhen tax time comes, you’ll be glad you did (and so will your business bank account).