Self-Employed Template |
Most of this information can be found here on the Canada Revenue Agency's (CRA) website. I've also added some more information based on my own experience. Expenses that appear on the template but that are not listed here should be self-explanatory based on their name.
Note: The remainder of this blog is for references purposes only - it's quite lengthy, and I don't expect anyone to read the whole thing (you're welcome to if you like!). These guidelines should be used as reference material to assist you in the use of the template or whatever else you're using to keep track of your expenses.
Generally, what can you deduct?
As a general rule of thumb, all reasonable amounts that you paid for the purposes of earning business income are deductible as expenses. Like any rule there are exceptions, but for the most part if you stick to this rule you will be okay.
Generally, what can't you deduct?
Any amounts paid that are personal in nature can NOT be deducted from your business income. For example, the property taxes on your vacation property in Florida are not tax deductible. If there are amounts that are both personal and business in nature, only the portion that is related to the business can be deducted as an expense.
Cost of goods/materials
Otherwise known as 'cost of goods sold', these costs relate directly to the final product that you sell. These costs are relevant to any business that sells goods. Whether you purchase goods for resale or manufacture your own goods, include the cost of materials and any other costs directly related to process of making your goods ready to be sold.
Advertising
Any amount paid for advertising through any medium (print, radio, TV, online) is deductible, as long as the advertising is directed to the Canadian market. There is a limitation on advertising in a periodical (magazines, newspapers). If the periodical contains less than 80% content (more than 20% advertising), then the expense is only 50% deductible.
Advertising also includes marketing and promotional items (gifts to clients, giveaways, etc.).
Number Crunchers has a blog posting dedicated to advertising expenses which goes into further detail on the topic.
Bad Debts
These are any amounts included in your total sales for the year that you don't expected to collect. For example, one of your customers may have gone bankrupt after you provided them with services - you know they won't be able to pay you. If in a subsequent year you receive an amount you previously deducted as bad debt, you must reverse the deduction in the year of collection.
Business tax, fees, licenses, dues, memberships, and subscriptions
This category of expense is fairly self explanatory. The only restriction on these amounts is if membership dues are paid to a club where the main purpose of the club is dining, recreation, or sporting activities - these expenses are not deductible.
Equipment/Other Major Purchases
The complexity of this category is determining whether an item is 'capital' or 'current' in nature. CRA's stance on distinguishing between the two types of expenses is listed here. In most situations, if an amounts is paid for something that has a lasting benefit, i.e. typically longer than one year, and is a larger dollar value item, it will be capital in nature. Judgement is sometimes required in distinguishing between the two.
Capital items are not deductible in full in the year of purchase. Instead, they are added to a 'pool', and a % of the cost can be deducted each year, called 'capital cost allowance' (CCA). The % deducted varies depending on the item. The purpose of keeping track of these capital items separately on the template is so that your tax preparer can go through these items with you and determine the appropriate pool to put them in. If you are unsure whether an item is capital or current in nature, it is best to classify it as capital and discuss it with your tax preparer. If you have determined that the item is current in nature, classify it as you would any other expense.
Interest
Interest and bank charges on your company's bank account can be deducted here, along with any other interest paid for the purpose of earning business income. Interest on a car loan should not be recorded here - it should be recorded under motor vehicle expenses. Financing fees are deductible, but they must be deducted over 5 years (i.e. 1/5 of the cost each year).
Legal, accounting, and other professional fees
Legal fees paid when purchasing a business property are not deductible - instead, you must include them in the cost to purchase the property. Accounting fees, such as fees paid to file your income taxes and prepare your HST returns are deductible. If a portion of your accounting fee relates to parts of your personal income tax return that aren't business related (ex. investment income), this portion of the fee is not deductible.
Meals & entertainment
For the most part, meals and entertainment are only 50% deductible. There are some specific situations in which the cost of meals would be 100% deductible, such as being in the business of selling food (ex. a restaurant), you bill the client for the full amount of the meal, or you provide food to all of your employees during an event. Any amount paid relating to golf (except for food & beverage) are not deductible at all - any other sport would qualify for the 50% deduction. Remember, these costs must be incurred for the purpose of earning income, for example, taking clients to a sporting event or out to dinner. On the template, enter the full amount of your meals and entertainment expenses - your tax preparer will know to make the adjustment (most tax preparation software makes the adjustment automatically).
Prepaid expenses
If you pay an amount relating to more than one year, you can only deduct the portion of the payment that relates to the current tax year. The remaining portion can be deducted in the year the payment relates to. For example, if you purchased an annual insurance policy on October 1, 2012 for $12,000, and your year-end is December 31, you can only deduct $12,000 x 3/12 months = $3,000 in 2012. The remaining $9,000 would be deducted in 2013.
Travel
Costs such as hotel fees and airfare incurred for business purposes would be deducted under this category. Any meals or entertainment expenses incurred while travelling would still be subject to the 50% limitation and should be included in the meals and entertainment category.
Motor vehicle expenses
You can deduct a % of your motor vehicle expenses related to your business travel. These expenses require the most amount of record keeping in order to deduct them. You must keep track of your total KM traveled during the year, as well as your total business km. You should maintain a logbook which keeps track of each business trip. This log should have the date, number of km travelled and purpose of trip. A mileage log is included in the Excel template for your use. A common mistake is made when determining your total business km. If your primary place of work is not your home, travel to and from your primary place of work is not considered a business trip. An example of an eligible business trip would be driving to a client's business location for a meeting.
You must keep track of all of your receipts related to your vehicle, regardless of whether they are business related. At the end of the year, you total all of your expenses, and deduct the % of them that relate to your business travel. Costs such as gas, maintenance, licensing and registration fees and insurance should be tracked. Leasing costs and interest are also deductible, but are subject to some additional limitations. Parking costs are also deductible, however unlike the other vehicle expenses, parking fees should be recorded only when they relate to business travel. If you own your car, you are eligible to claim CCA on your car (see Equipment/Other major purchases above for a discussion on CCA).
Home office expenses
You are eligible to deduct home office expenses if you meet one of two conditions:
1) Your home office is your principle place (>50%) of business, or,
2) You use your home office exclusively for business AND you regularly meet clients at your home.
If you situation does not clearly fit into one of these two categories, you should talk to your tax preparer about your specific situation to determine whether or not you are eligible to claim these expenses.
The amount which you can claim is usually calculated either by square footage or number of rooms in your home. Your home office area is divided by your total home area to arrive at a business %. If your home office is only partially used for business, you must prorate this percentage based on the amount of time you spend in your office related to your business.
Costs such as heat, hydro, water, property taxes, rent, insurance, mortgage interest, and maintenance costs can all be deducted. Amounts that do not specifically relate to your work space such as your home phone and internet, can not be deducted as a home office expense. Instead, deduct the % of these costs that relate to business activities under the 'telephone and utilities' category.
I look forward to hearing from you,
Jacob