The Most Commonly Missed Business Tax Deductions in Canada

What Tax Deductions am I missing?

If there’s anything that irks business owners, it’s paying the government more tax than they need to - and rightfully so! What I am going to discuss here is some common deductions that are missed and why you should be thinking bigger than writing off a few expenses here and there.

Here’s a story that I get a lot. “My friend told me that their accountant lets them deduct vacations to Mexico, their car and child care.” You may be thinking “I must be a sucker.” or “I need a better accountant.”

Here’s how I respond: In the right circumstances some of those things might be tax deductible or partially so. But, let me ask you this: are you trying to deduct personal expenses in your business or is there a valid business reason for those expenses? Deep breath, okay -- your friend may have misspoke or misunderstood what was exactly being expensed. They may have mixed up personal and business deductions or partial deduction in the case of travel. Deductions for business need a valid business reason for the expense - there are no loopholes for us 99%ers, just cheating. So, here’s a list of expenses you may be missing.

1. Home Based Business Expenses

If you run your business out of your home, you may be able to deduct a portion of your rent, utilities and other home expenses. Your home office must be used exclusively for business (i.e. not your dining room unless it is cordoned off as an office) or must be the principal place that you conduct your business. The space must also be used to meet with clients or customers (as of now, CRA’s position is that does not include video meetings, iknowright?! :-S)

2. Vehicle Expenses

You can deduct vehicle expenses that you incur for business purposes, but tracking them can be tricky. There are a couple ways to go about deducting vehicle expenses. For small businesses, we generally recommend that you keep any vehicle that you use for both business and personal use in your personal name. This will avoid some potential personal tax liability.

  1. The first way to do this (and simplest way) is to pay yourself a per kilometer rate based on CRA’s current allowance rate. This ensures that the payment is deductible by the business, but not taxed as income in your hands. You still must personally pay all the expenses such as maintenance, insurance and gas (no double-dipping: i.e. dipping the chip and then dipping it again). The limitation here is that this is only an option when you are an employee of your corporation.

  2. The second way is to tally all of your vehicle expenses for the year and multiply that amount by the percentage you used the vehicle for business. For example, if you drove 10,000km during the year and 3,000km of that was for business, you could deduct 30% of your vehicle expenses for the year. Yeah, I know, it’s a big headache.

Both methods require that you keep a log of business use of your vehicle and it has to be meticulously maintained or the expense could be disallowed. Check out Mile IQ if you are looking for a simpler way than keeping a clipboard in your car.

Bonus tip: driving to and from work does not suddenly become deductible if you are self-employed! If someone tells you that they are deducting that, you can tell them that they are doing it wrong!

3. Research and Development

Ok, this is admittedly a big undertaking, but there are some serious tax credits to be had if you qualify. I won’t write a book on this here as there are lot of resources out there on the information superhighway, but if you qualify and are not taking advantage of this… there are no words.

4. Meals and Entertainment

CRA limits the deductibility of most meals and entertainment costs to 50% of the amounts paid, but what can be missed is that you can have up to six events per year that are fully deductible as long as your whole staff is invited. Party on, Garth!

You Might Be Thinking Too Small

I understand there is a huge worry that you may be missing out on some tax deductions -  that is fair - but did you know the government also offers some very big incentives to build a successful business. It’s called the Lifetime Capital Gains Exemption and as of this year is worth $848,252 in tax free money. As you might expect there are some hoops to jump through, but basically if you can build up a business and sell your shares to another party, the gain may be eligible for this exemption. It’s a great incentive to build up a business that has value.

While it’s tempting to focus on a few dollars here and there to save, your time is better spent focusing on growing your business. Hiring a professional accountant is a great way to ensure you are getting the deductions you deserve, so you can focus on what you do best - growing your business.

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