Tax deductions are a tool that allows businesses to reduce the amount of taxes they pay to the Canadian government. These deductions apply to various business expenses necessary to generate income.
However, for a cost to be deductible, it must be deemed essential to generate income, be documented, and meet the requirements set by the Canada Revenue Agency (CRA). Discover the most common tax deductions for businesses in Canada and navigate the tax season stress-free!
What are business tax deductions?
Business tax deductions in Canada are expenses that businesses can deduct from their gross income to reduce the amount they must pay in taxes. Because the rules for tax deductions can change frequently, we recommend you consult an accountant or tax lawyer for advice on the specific deductions for which your business may be eligible.
In Canada, the Canada Revenue Agency (CRA) administers tax deductions for businesses. The CRA has several rules and requirements that businesses must meet to deduct certain expenses from their taxes. Therefore, it is essential to remember that the rules and requirements for tax deductions can change frequently.
It is recommended that you consult with an accountant or tax attorney for advice on deductions specific to your business and more if you are self-employed in Canada. Read on for more information!
Deductible business expenses in Canada
Business start-up expenses
Expenses used to start the business are deductible; however, you can only claim the costs if you operated the business during the tax period during which these expenses were incurred. To deduct a business expense, you must know when you started the business activity.
Supplies
You can deduct the cost of items your business indirectly used to provide goods or services. For example, cleaning products for the business premises, cleaning equipment, etc., or expenses for shipping products to customers or suppliers are deductible business costs.
Fuel expenses
You can deduct the cost of fuel (including gasoline, diesel, and propane), motor oil, and lubricants used in a business vehicle. This includes commercial vehicles such as trucks, vans, and automobiles.
Taxes, fees, licenses, and business dues
Annual license fees and some business taxes used to operate your business may be deductible.
Office expenses
Small items such as pencils, pens, stamps, paper clips, and stationery can be deducted. However, office furniture such as desks and chairs is not deductible as these are capital items.
Expenses for business use of housing and rent
You can deduct 20% of household expenses on your income tax return, such as office expenses, heat, electricity, mortgage interest (or rent), and property taxes. You can also deduct rent paid for property used in your business.
Wages, salaries, and benefits
You can deduct gross wages, Canada Pension Plan premiums, and employment insurance if your company has employees.
Business travel
Deducting expenses incurred outside the workplace for business is also possible. This deduction applies to the price of 15% of meals, beverages, and entertainment expenses.
Management and administration expenses
You can deduct fees paid for advice or the use of outside professional services, including consulting fees. You can also deduct fees to prepare and file your income tax and GST/HST returns.
Interest and bank charges
It is also possible to deduct interest incurred on loans used for business purposes or to acquire real estate for business purposes.
Property taxes
You can deduct property taxes on the land and building where your business is located. Property taxes related to the business use of the workspace at your home must be claimed as business use of home expenses.
Insurance costs
You may deduct all insurance costs incurred concerning the buildings, machinery, and equipment you use in your business and the business use of your home workspace.
Advertising expenses
Advertising in Canadian newspapers, radio, and television stations may also be deductible. To claim the expenses, you must meet certain Canadian content or ownership requirements, which do not apply if you advertise on foreign websites.
If you feel overwhelmed by the different cases, there's no need to worry. You can always take an accounting class to get help from a specialist.
How does the small business tax deduction work?
The Small Business Deduction (SBD) in Canada allows small businesses to reduce the tax they pay on their first $500,000 of income. This deduction provides a lower corporate tax rate of 9% to 12% on the active company's income up to $500,000, and once the company exceeds this threshold, it is taxed at the general corporate tax rate of 27%.
However, to claim these types of deductions, you must first have spent the money necessary to perform the business's functions. For example, if you purchased office furniture or office supplies for your small business, you can deduct these expenses by counting them as business expenses.
For more information, we recommend that you review the tax forms Declaration of Business or Professional Activities (T2125), Declaration of Fishing Activities (T2121), and Declaration of Agricultural Activities (T2042).
How do I qualify for small business deductions in Canada?
To qualify for small business deductions in Canada, your business must be a Canadian Controlled Private Corporation (CCPC), i.e., meet all of the following requirements:
- Be registered as a private corporation.
- Be a corporation resident in Canada and incorporated in Canada.
- It is not controlled directly or indirectly by one or more non-resident persons or by one or more public corporations.
- It is not controlled by a corporation resident in Canada that is listed on a designated stock exchange outside Canada.
If your company does not meet these conditions, it cannot be considered a CCPC and will not be eligible for the small business deductions the CRA offers.
To get more accurate information about CCPC, I recommend you visit the Type of Corporation section on the Government of Canada website, which you will find by visiting the Taxes section, then going to Income tax, and then to Corporation income tax.
Are you working as a salaried? Discover the best employment tax deductions.
How can small businesses pay less taxes in Canada?
Paying taxes is a legal obligation for all businesses in Canada. However, below are excellent strategies that small businesses can implement to reduce their tax burden legally.
- Take advantage of tax deductions: By correctly informing yourself, you can deduct certain expenses from your taxable income and significantly reduce your taxes. This could also help you better plan your cash flow and invest. To get tax deductions, you need first to be aware of tax deadlines in Canada.
- Keep accurate records: By law, you must keep accurate records of your income, expenses, deductions, and tax credits as an individual or business, as the CRA may request them to verify the accuracy of your tax returns. In addition, since making mistakes on your returns can lead to penalties and fines, keeping accurate records helps minimize this risk and unnecessary scares.
- Seek professional help: Always consulting with an accountant or tax attorney can help businesses learn about and take full advantage of tax deductions for which they may be eligible, avoid mistakes, and ensure their tax obligations are met.
It is important to remember that there is no magic formula for paying less tax. However, by following the above strategies, small businesses can legally and responsibly reduce their tax burden.
Would you like to maximize your tax credits in Canada?
Where to start?
For more accurate information and strategies for paying less tax in Canada, if you have a company or are considering becoming self-employed, consult the CRA website for the most up-to-date information or seek professional advice from an accountant or tax lawyer.
By following the recommendations in this blog, we are confident that you will find the Canadian tax season easier to understand and will be able to ensure that you comply with all your tax obligations promptly.
However, if you need additional help from professional accounting and tax experts, visit Superprof. Whether you want up-to-date information on how to file your taxes or what deductions you can access as a new entrepreneur, find accounting experts near you at the click of a button.
With Superprof's online platform, you'll find good accountants across Canada to help you understand everything related to accounting, from tax obligations to top tax deductions for businesses in Canada.
Learn all about accounting from the best accounting experts at Superprof!
Wrap up!
Discover the main tax deductions for businesses in Canada to find out how to reduce your tax burden as an entrepreneur, allowing you to subtract various expenses necessary to generate income or, for example, invest.
The main tax deductions for businesses include a wide range of costs, such as utilities, fuel, taxes and fees, office expenses, business travel, salaries, and bank interest, among many others. In addition, the Small Business Deduction (SBD) offers a reduced tax rate for the first $500,000 of active business income, incentivizing business growth.
However, to access these deductions, businesses must meet specific requirements set by the Canada Revenue Agency (CRA), and we invite you to visit their website for more information. It is essential to keep accurate records, seek professional advice, and ensure compliance with tax obligations to optimize tax management. Become a master with Superprof!
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