Presentation: What’s a reasonable business expense?

To make it easier for you to prepare materials for clients, we’ve developed this text for a slideshow on what does, and doesn’t, constitute a proper business expense. The slides are designed to help you educate investors and prospects about what will bring unwanted attention from CRA. We know you’ll want to customize them and add elements specific to your clients, so we’re providing a Word file to make that easier. All you need to do is fill in your own details and add them to your favourite presentation software or app.

Enjoy, and we hope this offering helps enhance your client meetings.

SLIDE 1

Be careful about what you write off

SLIDE 2

Declining revenue means Revenue Canada has an eye out for write-offs it deems beyond the pale.

SLIDE 3

CRA does not allow deductions for things it deems personal or living expenses.

SLIDE 4

Some business owners try to write off personal assets, such as a cottage or boat, arguing it’s used to host get togethers that benefit their companies.

SLIDE 5

Tax authorities are unlikely to go along with such write-offs.

SLIDE 6

And the Tax Act clearly states business owners aren’t allowed to write off personal living expenses as business costs.

SLIDE 7

Resist the temptation to have your company pay directly for these personal purchases.

SLIDE 8

Having assets not directly related to operation of the business, and their associated expenses, on a company’s books won’t sit well with buyers should you choose to sell your company.

SLIDE 9

Some prospective buyers may even insist you reimburse certain costs to the company as a condition of sale.

SLIDE 10

Travel and entertainment costs booked each year must be reasonable in the CRA’s eyes.

SLIDE 11

You must be able to show business activity commensurate with any expenses.

SLIDE 12

And CRA has its eyes peeled for those mixing business with pleasure; so don’t even think about trying to write off a vacation as a business expense.

SLIDE 13

Unless a spouse or children works for your company, and you can legitimately justify their presence on a business trip, don’t try to write off their hotel, lodging or meal costs.

SLIDE 14

While CRA understands most business hotels are on the pricey side, they will push back on receipts from luxe lodgings with excessive nightly rates.

SLIDE 15 And, simply discussing business over a meal is not sufficient to warrant a deduction.

SLIDE 16

Never try to write off clearly personal purchases, such as books, music CDs or DVDs. These aren’t legitimate entertainment write-offs.

SLIDE 17

Bottom line: If an expense isn’t directly related to your ability to earn business income, it’s not justifiable in the eyes of Revenue Canada.

SLIDE 18

CRA will look at the ratio between the expenses and the revenue earned as a result of those costs.

SLIDE 19

So a deal costing $50,000 for travel and entertainment that brings your company a $250,000 contract may not pass muster because the CRA is looking for a direct cause and effect relationship between expenses and revenues.

SLIDE 20 The Income Tax Act says deductions for expenses can only be made if “it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business.”

SLIDE 21 Stay inside the lines.