“Why did the entrepreneur become a chef? So he could write off all his meals as ‘research expenses.’”
There are plenty of jokes to go around about taxes, but one thing is certain: most people aren’t usually excited about paying them. While figuring out your business’s taxes can be a challenging process, you can take advantage of various tax breaks if you keep good records. More specifically, keeping track of your tax deductible expenses can significantly reduce your taxable business income, which means more money in your pocket!
Frequently Asked Questions
Tax laws are anything but straightforward, which means that there are typically a lot of questions that accompany the tax process. While it can be helpful to hire a tax accountant for filing your business’s taxes, it’s important to understand the basics about tax deductible expenses in Canada to prepare for tax season throughout the year.
What is a Tax Write-Off?
A tax write-off is the same thing as a tax deduction. In short, “A tax deduction is an amount that you can deduct from your taxable income to lower the amount of taxes that you owe” (Investopedia).
Let’s say a business makes $100,000 in a year but has $15,000 worth of tax deductible expenses. This means that only $85,000 is taxable income. Enough tax write-offs might allow you to join a lower tax bracket, which will reduce the amount you owe.
The Canada Revenue Agency provides a list of tax deductible expenses, but your business will need to keep detailed records if you want to take advantage of them.
How Do You Claim a Tax Deduction in Canada?
An incorporated business will need to file a corporate tax return (T2 form) as well as a personal tax return (T1). Unincorporated businesses only need to file the general T1 form.
For an unincorporated business:
When you fill out your tax return (T1 form), you will report your total income (Line 15000) from all sources.
Then, you can subtract deductions (Line 20600 to Line 23500), like child-care expenses and moving costs, to get your net income (Line 23600).
Some less common deductions such as the Canadian Forces personnel deduction (Line 24400 to Line 25600) may further reduce your income.
Finally, you will know your taxable income (Line 26000), which determines how much tax you owe.
What’s the Difference Between a Deduction and a Credit?
Both tax deductions and tax credits provide benefits to the taxpayer, but they have different roles. Tax deductions reduce your taxable income while tax credits decrease the amount of tax you owe on that taxable income.
Input Tax Credits (ITC) are an example of tax credits that a business can apply for in Canada. They allow businesses to recover the Goods and Services Tax (GST/HST) spent on purchases used to produce goods and services.
Examples of tax deductions for a business include start-up costs, rent, utilities, and more.
What Are Some Common Tax Write-Offs for Canadian Businesses?
Keep in mind that you can’t deduct personal expenses when filing taxes for your business. However, there are several business operating expenses that you can apply as tax deductions.
Some common deductions include:
- Supplies & Office Expenses – Office expenses include small items like pencils, pens, stamps, and stationary. You can also write-off supplies that were indirectly used to provide goods and services (e.g. cleaning supplies that a plumber uses).
- Home Office Expenses – If you operate your business from home, there are several deductions you can apply including: mortgage interest, utilities, property taxes, repairs and maintenance, home insurance, internet, phone, and office equipment.
- Automobile Expenses – You can write-off vehicle expenses used for the business including: fuel, parking fees, repairs and maintenance, toll charges, registration fees, and more. The CRA will highly scrutinize these types of deductions so it’s important that you keep detailed records.
- Insurance – You can deduct commercial insurance premiums used for your business. This includes insurance policies that cover buildings, machinery, and equipment.
- Advertising – This includes Canadian radio ads, television ads, newspaper ads, and digital advertising.
- Bad Debt – Not all bad debt is eligible to be a tax write-off, but generally you can deduct an amount owed if it’s already included in your income for the year.
Additional deductions include:
- Business start-up costs
- Business tax, fees, licences and dues
- Salaries, wages, and benefits
- Travel (typically a 50% deduction)
- Rent
- Management and administration fees
- Interest and bank charges
- Property taxes
- Telephone and utilities
Check out the CRA’s business expenses page for a thorough list of potential tax deductions you can utilize on your business’s tax return.
Having a basic understanding of tax regulations is essential for potential business owners, whether you want to start a business from scratch or own a franchise location. If you want more information about tax and financial reporting requirements specific to franchise owners, read our blog: What You Need to Know About Franchising and Taxes in Canada.
Interested in Buying a Canadian Franchise?
If you are considering franchise ownership in Canada, then creating a solid business plan is the first step to success. Conveniently, determining your tax deductible business expenses is a part of that upfront planning. Another step towards success is working with FranNet to find the right brand to partner with. Our expert franchise consultants are dedicated to understanding your specific needs and abilities so that you can thrive as a franchise owner. We will guide you through the entire process and provide you with the resources you need. These services are completely free to you! Schedule your consultation today to get started!