Transcript

Host: Welcome to the segment called Business expenses, part of the Reporting Business Income and Expenses video.

With me is Linda Bishop. Welcome Linda.

Can you explain to us what business expenses are?

Subject matter expert: A business expense is a cost you incur for the sole purpose of earning business income.

Any claims for business expenses must be backed up with a sales invoice, an agreement of purchase and sale, a receipt, or some other voucher that supports the expenditure.

If you pay cash for any business expenses, be sure to get receipts or other vouchers. Receipts should include the vendor's name and the date.

Host: Can you provide our viewers with some details of the more common types of business expenses, which can be claimed by small business owners?

Subject matter expert: We will discuss some common business expenses. There are two kinds of expenses: current and capital.

Current or operating expenses refer to things that are involved in the day-to-day running of the business, like rent, utilities, wages, accounting and legal fees, and the cost of your stock.

Items such as tools, fixtures and fittings, computers and vehicles are called capital expenditures and are also deductible; however, the deduction is reported differently.

For a more detailed list of current and capital expenses, information is available in the following publication:

Guide T4002, Business and Professional Income

Host: Why is it important to know the difference?

Subject matter expert: Current or operating expenses and capital expenses are treated differently for tax purposes. Generally, current expenses are deductible as they are incurred and capital expenditures are deducted over a number of years, since these are considered to be for long-term assets.

Host: Can you tell me about the different types of business expenses?

Subject matter expert: Certainly. There are a number of business expenses such as vehicle expenses, employee expenses, business-use-of-home expenses, and capital expenses.

Host: Can you tell us more about the vehicle expenses?

Subject matter expert: You can deduct expenses you incur to run a motor vehicle that you use to earn business income.

The types of vehicle expenses you can claim are:

• license and registration fees
• fuel costs
• insurance
• interest on money borrowed to buy a motor vehicle
• maintenance and repairs and
• leasing costs

Host: So, is there a per kilometre rate that business owners can claim against their business income?

Subject matter expert: To clarify, there is no per kilometre rate that business owners can claim for mileage. If you use a motor vehicle for both business and personal use, you can deduct only the part of the expenses that relates to earning business income.

To calculate the business part of your vehicle expenses you must keep all receipts for your expenses, as well as a record of the total kilometres you drove, and the kilometres you drove to earn income.

Host: So, do I need to keep a log book for my vehicle?

Subject matter expert: Yes, you need to keep some sort of record of the business use of your vehicle in order to be eligible to claim a part of your vehicle expenses as a business expense.

For each business trip, list the date, destination, purpose, and the number of kilometres you drove. Also, make sure you write down the odometer reading of each vehicle at the start and end of the year. If you change motor vehicles during the year, write down the odometer reading when you buy, sell, or trade the vehicle.

Host: That still doesn't tell me how much I can claim.

Subject matter expert: For example, a business owner drove 18,500 kilometres for business purposes. He drove a total of 37,500 kilometres for the year. That means that he used the car 49.33% of the time for business use.

The total of his car expenses for the year is $6,500.

Using the percentage of kilometres driven for business use, the business owner is eligible to claim $3,206 as a business expense.

Host: I understand now. The log book tells me what percentage of my car expenses can be claimed as a business expense.

Subject matter expert: Yes, exactly.

Host: Using the log book, is there an easier way of keeping track of my automobile usage other than what you've proposed?

Subject matter expert: Yes there is a more simplified method. After one complete year of keeping a logbook to establish a base year, a three month sample logbook can be used to extrapolate business use for the entire year, providing the usage is within the same range (within 10%) of the results of the base year. Businesses will need to demonstrate that the use of the vehicle in the base year remains representative of its normal use.

For more information about the sample logbook policy, refer to the CRA webpage called Documenting the use of a vehicle. The link is included in the Related links for this segment.

Host: Thank you Linda, can we talk about the employee expenses?

It seems logical that the costs of salaries or wages paid to my employees is deductible as a business expense, am I right?

Subject matter expert: Yes Janice, that's correct, salaries and wages paid are fully deductible against any business income earned.

Host: Can you give us some tips on what other expenses related to employees are deductible as business expenses?

Subject matter expert: Certainly. In addition, you can deduct workers' compensation amounts and the employers' part of the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) contributions, and Employment Insurance premiums (EI).

You can also deduct any premiums you pay on behalf of your employees for any sickness, accident, disability, or income insurance plans you provide to your employees.

Host: Where can a small business owner get more information on employee-related expenses?

Subject matter expert: For more information on employee expenses, go to the CRA's webpage on payroll at www.cra.gc.ca/payroll.

There is also a CRA Video called Payroll for a new small business that you can view at www.cra.gc.ca/videogallery.

Host: You mentioned earlier that capital expenses related to buying assets for my business are claimed differently. How does that work?

Subject matter expert: Capital expenses or purchases of items that have lasting value are deductible, usually over the life of the asset. For the most part, you would use the declining balance method to calculate your annual deduction. This means that you claim capital cost allowance on the purchase price of the property minus the deduction you claimed in previous years, if any. The remaining balance declines over the years as you claim the deduction.

Host: That sounds like depreciation to me. How much can a business owner write off each year?

Subject matter expert: Well, it depends on the item. Each asset has its own category with a percentage of the cost that you can deduct each year.

For more information on the various classes and rates, go to the CRA's webpage on Capital cost allowance. The link is included in the Related links for this segment.

Host: Thank you Linda.

This concludes the segment called Business expenses, part of the CRA's Reporting Business Income and Expenses video.

Thank you for watching.