How to deduct business expenses

Why read this?

• › You operate a business
• › You are a contractor or freelancer
• › You are self-employed

Rules

• You can deduct GST or HST incurred on business expenses, less the amount of any GST or HST tax already claimed under the input tax credit. The input tax credit allows businesses to recover the sales tax they paid for any goods or services for the business.
• Any unused rebates need to be entered on line 8230 (Other Income) of form T2125.
• If you have both business and professional income, you must complete a separate T2125 for each.

What to do?

“As a rule, you can deduct any reasonable current expense you paid or will have to pay to earn business income,” says CRA.
• a. Fill out Form T2125, Statement of Business or Professional Activities, to calculate the net income you need to report in her general income and benefit return.
• b. To complete T2125, you’ll need the industry code that matches your main business activity. A list of codes can be found on CRA’s website. You’ll also need your CRA business number.
• If your business has a tax shelter, you’ll also need to complete Form T5004, Claim of Tax Shelter Loss or Deduction.

It’s a “routine part of CRA’s audit procedures to make sure that meals and entertainment expenses are tracked, identified and the limitation is applied,” says Maureen McCullough, KPMG senior manager taxation.

• 

  Beware of personal and professional grey areas. Personal expenses are disallowed under the Income Tax Act. When an expense is incurred for business and personal reasons, do not to claim the personal Portion, says McCullough.

  Don’t try and claim these

  CRA has deemed these claims ineligible:

  › Charitable donations and political contributions

  › The cost of getting to and from work

  › Home offices, if not used more than 50% of the time or to generate business income

  › Gym memberships

  › Sightseeing while on a business trip

  › Golf club memberships

  › Business clothing (excluding uniforms)

  › Business retreats or trips, or employees and customers that don’t help the business generate income

  Claim these items using CRA form T2125

› Advertising (Line 8521)

› Allowance on eligible capital property (Line 9935)

› Bad debts (Line 8590)

› Business start-up costs

› Business taxes, fees, licences, dues, memberships and subscriptions (Line 8760)

› Business-use-of-home expenses (Line 9945)

› Capital cost allowance (Line 9936)

› Current or capital expenses

› Delivery, freight and express (Line 9275)

› Fuel costs (Line 9224)

› Insurance (Line 8690)

› Interest (Line 8710)

› Legal, accounting and other professional fees (Line 8860)

› Maintenance and repairs (Line 8960)

› Management and administration fees (Line 8871)

› Meals and entertainment (Line 8523)

› Motor vehicle expenses

› Office expenses (Line 8810)

› Other expenses (Line 9270)

› Prepaid expenses

› Property taxes (Line 9180)

› Rent (Line 8910)

› Salaries, wages and benefits (Line 9060)

› Supplies (Line 8811)

› Telephone and utilities (Line 9220)

› Travel (Line 9200)