Business expenses

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Business expenses

In general, you can deduct any reasonable current expense you paid or will have to pay to earn business income.

The amount you can deduct in a given year for any expense depends if it is considered a current year expense or capital expense. For more information, see Current or capital expenses and Basic information about Capital Cost Allowance.

The expenses you can deduct include any GST/HST you incur on these expenses less the amount of any input tax credit claimed.

Deduct only the business part of expenses from business income. You cannot deduct personal expenses. In addition, you cannot claim expenses you incur to buy capital property.

Notes

When you claim the GST/HST you paid on your business expenses as an input tax credit, reduce the amounts of the business expenses you show by the amount of the input tax credit. Do this when the GST/HST for which you are claiming the input tax credit was paid or became payable.

Similarly, subtract any other rebate, grant, or assistance from the expense to which it applies. Any such assistance you claim for the purchase of depreciable property used in your business will affect your claim for capital cost allowance (CCA) .

If you cannot apply the rebate, grant, or assistance you received to reduce a particular expense, or to reduce an asset's capital cost, include the total in other income on form T2125 Statement of Business or Professional Acitivities, at Part 3 on line 8230.

The following may be considered when determining operating expenses:

Advertising

You can deduct expenses for advertising, including advertising in Canadian newspapers and on Canadian television and radio stations. You can also include any amount you paid for business cards and as a finder's fee. Certain restrictions apply to the amount of the expense you can deduct for advertising in a periodical:

  • You can deduct all the expense if your advertising is directed to a Canadian market and the original editorial content in the issue is 80% or more of its total non-advertising content.
  • You can deduct 50% of the expense if your advertising is in a periodical directed to a Canadian market and the original editorial content in the issue is less than 80% of its total non-advertising content.

You cannot deduct expenses for advertising directed mainly to a Canadian market when you advertise with a foreign broadcaster.

Allowance on eligible capital property

You may buy property that does not physically exist but gives you a lasting economic benefit. Some examples are goodwill, franchises, concessions, and licences for an unlimited period. We call this kind of property eligible capital property. The price you pay to buy this type of property is an eligible capital expenditure.

You cannot deduct the full cost of an eligible capital expenditure, since it is a capital cost and provides a lasting economic benefit. However, you can deduct part of its cost each year. We call the amount you can deduct your annual allowance.

We consider franchises, concessions, and licences with a limited period to be depreciable properties, not eligible capital properties.

Bad debts

You can deduct an amount for a bad debt if:

  • you had determined that an account receivable is a bad debt in the year
  • you had already included the receivable in income

Business start up costs

To deduct a business expense, you need to have carried on the business in the fiscal period in which the expense was incurred. You have to be clear about the date your business started.

Where a taxpayer proposes to undertake a business and makes some initial expenditures with that purpose in mind, it is necessary to establish whether the expenditure preceded the start of the business or whether the business had in fact begun and there were expenses incurred during preliminary steps leading to the start of normal operations.

Consequently, the date when the business can be said to have commenced must be known.

Determining what you can claim as a start up expense can be difficult. For more information, see Interpretation Bulletin IT-364, Commencement of Business Operations, or Guide RC4022, General Information for GST/HST Registrants.

Business tax, fees, licences, and dues

You can deduct any annual licence fees and business taxes you incur to run your business.

You can also deduct annual dues or fees to keep your membership in a trade or commercial association.

You cannot deduct club membership dues (including initiation fees) if the main purpose of the club is dining, recreation, or sporting activities.

Delivery, freight, and express

You can deduct the cost of delivery, freight, and express incurred in the year that relates to your business.

Fuel costs (except for motor vehicles)

You can deduct the cost of fuel (including gasoline, diesel, and propane), motor oil, and lubricants used in your business.

For information about claiming the fuel used in your motor vehicle, see Motor vehicle expenses .

The cost of fuel related to business use of work space in your home has to be claimed as business-use-of-home expenses .

Insurance

You can deduct all ordinary commercial insurance premiums you incur on any buildings, machinery, and equipment you use in your business.

The insurance costs related to your motor vehicle have to be claimed as Motor vehicle expenses.

The insurance costs related to business use of work space in your home have to be claimed as business-use-of-home expenses.

In most cases, you cannot deduct your life insurance premiums. However, if you use your life insurance policy as collateral for a loan related to your business, you may be able to deduct a limited part of the premiums you paid. For more information, see Interpretation Bulletin IT-309, Premiums on Life Insurance Used as Collateral.

Interest charges

You can deduct interest incurred on money borrowed for business purposes or to acquire property for business purposes. However, there are limits on:

  • the interest you can deduct on money you borrow to buy a passenger vehicle. For more information, go to Motor vehicle expenses.
  • the amount of interest you can deduct for vacant land

Usually, you can only deduct interest up to the amount of income from the land that remains after you deduct all other expenses. You cannot use any remaining amounts of interest to create or increase a loss, and you cannot deduct them from other sources of income.

Fees, penalties, or bonuses paid for a loan

You can deduct the fee you pay to reduce the interest rate on your loan. You can also deduct any penalty or bonus a financial institution charges you to pay off your loan before it is due. Treat the fee, penalty, or bonus as prepaid interest and deduct it over the remaining original term of your loan.

For example, if the term of your loan is five years and in the third year you pay a fee to reduce your interest rate, treat this fee as a prepaid expense and deduct it over the remaining term of the loan. For more information, go to Prepaid expenses.

Fees deductible over five years

You can deduct certain fees you incur when you get a loan to buy or improve your business property. These fees include:

  • application, appraisal, processing, and insurance fees
  • loan guarantee fees
  • loan brokerage and finder's fees
  • legal fees related to financing

You deduct these fees over a period of five years, regardless of the term of your loan. Deduct 20% in the current year and 20% in each of the next four years. The 20% limit is reduced proportionally for fiscal periods of less than 12 months.

However, if you repay the loan before the end of the five-year period, you can deduct the remaining financing fees then. The number of years for which you can deduct these fees is not related to the term of your loan.

Fees deductible in the year incurred

If you incur standby charges, guarantee fees, service fees, or any other similar fees, you may be able to deduct them in full in the year you incur them. To do so, they have to relate only to that year. For more information, see Interpretation Bulletin IT-341, Expenses of Issuing or Selling Shares, Units in a Trust, Interests in a Partnership or Syndicate, and Expenses of Borrowing Money.

Interest deductible on property no longer used for business purposes

You may be able to deduct interest expenses for a property you used for business purposes, even if you have stopped using the property for such purposes because you are no longer in business. For more information, see Income Tax Folio S3-F6-C1, Interest Deductibility.

Interest on loans made against insurance policies

You can deduct interest you paid on a loan made against an insurance policy, as long as the insurer did not add the interest you paid to the adjusted cost base of the insurance policy. To claim the interest you paid for the year, have the insurer verify the interest before June 16 of the following year on Form T2210, Verification of Policy Loan Interest by the Insurer.

Capitalizing interest

You can choose to capitalize interest on money you borrow:

  • to buy depreciable property;
  • to buy a resource property; or
  • for exploration and development.

When you choose to capitalize interest, add the interest to the cost of the property or exploration and development costs instead of deducting the interest as an expense.

Do not deduct the capitalized interest as a current expense. For more information, read "Interest" in Guide T4002, Business and Professional Income.

Interest related to work space in your home

The interest related to business use of work space in your home has to be claimed as business-use-of-home expenses.

Legal, accounting, and other professional fees

You can deduct the fees you incurred for external professional advice or services, including consulting fees.

You can deduct accounting and legal fees you incur to get advice and help with keeping your records. You can also deduct fees you incur for preparing and filing your income tax and GST/HST returns. For more information, see Interpretation Bulletin IT-99-CONSOLID, Legal and Accounting Fees.

You can deduct accounting or legal fees you paid to have an objection or appeal prepared against an assessment for income tax, Canada Pension Plan or Quebec Pension Plan contributions, or employment insurance premiums. However, the full amount of these deductible fees must first be reduced by any reimbursement of these fees that you have received. Enter the difference on line 232, Other deductions, of your income tax return.

If you received a reimbursement in the tax year, for the types of fees that you deducted in a previous year, report the amount you received on line 130, Other income, of your income tax return.

You cannot deduct legal and other fees you incur to buy a capital property. Instead, add these fees to the cost of the property. For more information on capital property, see Claiming capital cost allowance (CCA).

Maintenance and repairs

You can deduct the cost of labour and materials for any minor repairs or maintenance done to property you use to earn business income.

However, you cannot deduct any of the following

  • the value of your own labour
  • the costs you incur for repairs that are capital in nature (capital expense)
  • the cost you incur for repairs that have been reimbursed by your insurance company

For repairs that are capital in nature, you can claim a capital cost allowance (CCA).

You have to claim the maintenance and repairs related to business use of work space in your home as business-use-of-home expenses.

For more information about capital cost allowance, see Guide T4002, Business and Professional Income.

Management and administration fees

You can deduct management and administration fees, including bank charges, incurred to operate your business. Bank charges include those for processing payments.

Do not include:

Instead, report these amounts separately.

Meals and entertainment (allowable part only)

The maximum amount you can claim for food, beverages, and entertainment expenses is 50% of the lesser of the following amounts:

  • the amount you incurred for the expenses; or
  • an amount that is reasonable in the circumstances.

These limits also apply to the cost of your meals when you travel or go to a convention, conference, or similar event. However, special rules can affect your claim for meals in these cases. For more information, see Travel and Convention expenses.

These limits do not apply if any of the following apply:

  • Your business regularly provides food, beverages, or entertainment to customers for compensation (for example, a restaurant, hotel, or motel).
  • You bill your client or customer for the meal and entertainment costs, and you show these costs on the bill.
  • You include the amount of the meal and entertainment expenses in an employee's income or would include them if the employee did not work at a remote or special work location. In addition, the amount cannot be paid or payable for a conference, convention, seminar, or similar event and the special work location must be at least 30 kilometers from the closest urban centre with a population of 40,000 or more. For more information about urban centres, see Statistics Canada data on Population and dwelling counts, for urban areas.
  • You incur meal and entertainment expenses for an office party or similar event, and you invite all your employees from a particular location. The limit is six such events per year;
  • You incur meal and entertainment expenses for a fund-raising event that was mainly for the benefit of a registered charity.
  • You provide meals to an employee housed at a temporary work camp constructed or installed specifically to provide meals and accommodation to employees working at a construction site (note that the employee cannot be expected to return home daily).

Entertainment expenses include tickets and entrance fees to an entertainment or sporting event, gratuities, cover charges, and room rentals such as for hospitality suites. For more information, see Interpretation Bulletin IT-518, Food, Beverages, and Entertainment Expenses.

Long-haul truck drivers

Expenses for food and beverages consumed by a long-haul truck driver during an eligible travel period are deductible at 80%.

An eligible travel period is a period of at least 24 continuous hours throughout which the driver is away from the municipality and metropolitan area that he or she resides in (the residential location) and is driving a long-haul truck that transports goods to, or from a location that is beyond a radius of at least 160 kilometers from the residential location.

Extra food and beverages consumed by self-employed

This information is for self-employed:

  • on foot
  • bicycle couriers
  • rickshaw drivers

They can deduct the cost of the extra food and beverages they must consume in a normal working day (8 hours) because of the nature of their work.

The daily flat rate that can be claimed is $17.50.

If you are claiming this deduction you should be prepared to provide log books showing the days worked and the hours worked on each of these days during the tax year. The CRA may also ask for dispatch slips or other documents to support the days worked during the tax year.

By using this flat rate deduction, you will not be required to maintain or submit receipts for the extra meal and beverage consumed.

If you want to claim more than the flat-rate amount, the Canada Revenue Agency will also need:

  • supporting receipts for all food and beverages claimed
  • something that clearly shows the extra amount of food and beverages required because of the nature of your work, and how this amount exceeds what the average person would consume both in terms of cost and quantity

Prepaid expenses

A prepaid expense is an expense you pay ahead of time. Under the accrual method of accounting, claim any expense you prepay in the year or years in which you get the related benefit.

Example

Suppose your fiscal year-end is December 31, 2016. On June 30, 2016, you prepay the rent on your store for a full year (July 1, 2016, to June 30, 2017). You can only deduct one-half of this rent as an expense in 2016. You deduct the other half as an expense in 2017.

For more information, see Interpretation Bulletin IT-417, Prepaid Expenses and Deferred Charges.

Property taxes

You can deduct property taxes you incurred for property used in your business. For example, you can deduct property taxes for the land and building where your business is situated.

The property tax related to business use of work space in your home has to be claimed as business-use-of-home expenses.

Office expenses

You can deduct the cost of office expenses. These include small items such as:

  • pens
  • pencils
  • paper clips
  • stationery
  • stamps

Office expenses do not include items such as:

  • calculators
  • filing cabinets
  • chairs
  • desks

These are capital items.

Rent

You can deduct rent incurred for property used in your business.For example, you can deduct rent for the land and building where your business is situated.

The rent expense related to business use of work space in your home has to be claimed as business-use-of-home expenses.

Salaries, wages, and benefits (including employer's contributions)

You can deduct gross salaries and other benefits you pay to employees.

Do not include:

  • salaries and wages such as direct wage costs or subcontracts
  • drawings of the owner(s) of the business
  • salaries or drawings of the owner(s) of the business since salaries or drawings paid or payable to you or your partners are not deductible

The Canada Pension Plan (CPP) is for all workers, including the self-employed. Employers, employees and most self-employed individuals must contribute to the CPP. The CPP can provide basic benefits when you retire or if you become disabled. When you die, the CPP can provide benefits to your surviving spouse/common-law partner and your dependent children under 25. For more information on contribution and benefits, go to Service Canada.

Quebec workers including the self-employed are covered under the Quebec Pension Plan (QPP).

As the employer, you can deduct your part of the following amounts payable on employees' remuneration:

  • CPP or QPP contributions
  • Employment insurance (EI) premiums
  • Provincial parental insurance plan premiums (an income replacement plan for residents of Quebec - go to Revenu Québec for details)
  • Workers' Compensation amounts for your employees

You report each salary by the end of February on a T4 slip, Statement of Remuneration Paid, or T4A slip, Statement of Pension, Retirement, Annuity and Other Income.

You can also deduct any premiums you pay for an employee for a sickness, an accident, a disability, or an income insurance plan. For more information on these slips, see the T4001, Employer's Guide - Payroll Deductions and Remittances, and go to Payroll

You can deduct the salary you pay to your child, as long as you meet all these conditions:

  • you pay the salary
  • the work your child does is necessary for earning business or professional income
  • the salary is reasonable when you consider your child's age, and the amount you pay is what you would pay someone else

Keep documents to support the salary you pay your child. If you pay your child by cheque, keep the cancelled cheque. If you pay cash, have the child sign a receipt.

Instead of cash, you can pay your child with a product from your business. When you do this, claim the value of the product as an expense and add to your gross sales an amount equal to the value of the product. Your child has to include the value of the product in his or her income.

You can also deduct the salary you pay to your spouse or common-law partner. When you pay your spouse or common-law partner a salary, use the same rules that apply to paying your child.

Report the salaries you pay to your children and spouse or common-law partner on T4 slips, the same as you would for other employees. However, you cannot claim as an expense the value of board and lodging you provide to your dependent children and your spouse or common-law partner.

For more information on these slips, see the T4001, Employer's Guide - Payroll Deductions and Remittances.

Supplies

You can deduct the cost of items the business used indirectly to provide goods or services (for example, drugs and medication used in a veterinary operation, or cleaning supplies used by a plumber).

Telephone and utilities

You can deduct expenses for telephone and utilities, such as gas, oil, electricity, and water, if you incurred the expenses to earn income.

The expenses for utilities that are related to business use of work space in your home have to be claimed as business-use-of-home expenses.

Travel

You can deduct travel expenses you incur to earn business and professional income. Travel expenses include:

  • public transportation fares
  • hotel accommodations
  • meals

In most cases, the 50% limit applies to the cost of meals, beverages, and entertainment when you travel. For more information, go to Meals and entertainment (allowable part only).

The 50% limit also applies to the cost of food and beverages served and entertainment enjoyed when you travel on an airplane, train, or bus, when the ticket price does not include such amounts.

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Date modified:
2017-01-03

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