The CRA defines a business expense as: “A cost incurred for the sole purpose of earning business income”. As expected, depending on the nature of the business you are running, the expenses are going to be quite different. As such the CRA has used a very broad definition to allow all sorts of expenses to be eligible deductions. As a general rule or test, you need to think about whether the expense is directly incurred for gaining, producing or maintaining income and can be expected to generate income related to your business.
There is no set or list of deductible expenses, however some examples of common types of business expenses are:
- Meals & Entertainment
- Dues, fees, memberships, and subscriptions
- Office supplies
- Legal, accounting and professional fees
- Maintenance and repairs
- Salaries, wages and benefits
- Travel costs
Costs that are not eligible
The CRA has a general rule that you cannot deduct any expense that is not directly related to earning business income. Does that sound familiar? Similar to the deductible expenses, there is no set rule or list of expenses that are not allowed. Again, depending on the nature of the business, the costs related to producing income can be very different.
There may be exceptions, however some examples of common types of non-deductible expenses are:
- Personal expenses, or personal portion of expenses
- Living expenses such as food and clothes(with the exception of travelling for business)
- Mileage or travel to and from your regular workplace
- Penalties, fines or tickets
- Donations to charities or political parties
- Principal portion of payments made for mortgage
- The value or salary paid for your own labor
- 50% of meals & entertainment are considered non-deductible
- Recreational club dues (such as golf fees)
Business Expenses – Common Misconceptions
I drive my car for work, can I claim those costs?
If you use your vehicle for business you can deduct a portion of the costs associated. In order to do so you must track the number of km’s driven on each business trip. Note that you cannot deduct the trips from your home to your regular workplace, these are considered personal. You can than deduct the proportion of the costs related to that vehicle based on the proportion of personal and business km’s. Examples of some of the costs related to the vehicle are: fuel, oil, insurance, licensing, maintenance and repairs. The CRA requires that maintain a log which shows the total personal and business km’s driven in the year as well as maintain evidence for all of the costs claimed.
I have an office in my home, can I claim those costs?
You can deduct the costs related to a home office, or home workspace of any kind, if you use the space as your principal place of business. If not, than the space must be used only for business purposes and you must use the space on a regular and on-going basis to meet with your clients or customers. So, if you have a home office that you use in the evenings to get extra work done, but you do not meet any clients or customers there, you cannot deduct any costs. Similarly, if you have an office, but it doubles as a guest room, or any other personal function, you cannot deduct any costs.
If you have determined that you do have a workspace that is deductible, you may be allowed to deduct a portion of your home expenses such as: heating and utility costs, insurance costs, parts of your property taxes and parts of your mortgage interest. To calculate the portion that you can deduct you must use a reasonable basis. The most reasonable basis is usually the area of the workspace divided by the total area of the home.
I trade services with a business across the street, but no money is exchanged, I don’t need to claim those.
Actually no, the CRA refers to any trading of goods or services as a barter transaction. An example of a barter transaction is one bookkeeping business provides free services to an advertising business in exchange for advertising services. In this case both businesses would have to include the services as business income based on the fair value of the services provided.