How to deduct business expenses

Why read this?

• › Your client operates a business
• › Your client is a contractor or freelancer
• › Your client is self-employed

Rules

• Your client 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 your client has 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 your client needs to report in her general income and benefit return.
• b. To complete T2125, you’ll need the industry code that matches your client’s main business activity. A list of codes can be found on CRA’s website. You’ll also need your client’s CRA business number.
• If the client’s business has a tax shelter, you’ll also need to complete Form T5004, Claim of Tax Shelter Loss or Deduction.

How to deduct mileage

1.

Your client must keep an annual log recording all business driving, including dates, destinations, the reason for each trip and the kilometres traveled.

2.

After she’s reported an entire year, she can then use a sample of three months each year to establish vehicle usage, as long as that usage is within 10% of the original usage logged in the first year.

• If it varies by more than 10%, she must re-establish usage with a new logbook.
• The logbook must be kept for six years after the last time it was used.
• If your client uses more than one vehicle for business, keep a log for each.
  • Under CRA’s simplified system, multiply the number of meals (to maximum of three a day) by $17, which is the CRA’s meal rate, and divide by two.
  • Under the detailed system, the client must log each expense, whether it was breakfast, lunch or dinner, and keep all receipts.
    • 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)

3.

Report that amount on Form TL2, Claim for Meals and Lodging Expenses.

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 McCullough.

Sources: Maureen McCullough, KPMG senior manager taxation, C.A. and Canada Revenue Agency

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

3.

Keeping a log is preferable. But business owners can also use their Microsoft Outlook calendars or appointment books and reconstruct what their business use would’ve been, says Maureen McCullough, KPMG senior manager taxation.

How to deduct meals on a business trip

1.

Your client can claim up to 50% of her meal expenses on a business trip.

2.

There are two ways to log the claim; both require your client to record the trip date, destination and meals.