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Before making a major financial decision you
should consult a qualified professional.
In general, expenses incurred in order to earn business
or property income are tax
deductible. Many of your expenditures will be fully deductible in the year in which
they are made. There are exceptions and limitations.
Incorporation Expenses
According to IT-143R3
paragraph 13 (Archived), the expenses of incorporation, reorganization or
amalgamation, including all expenses incurred to bring a corporation into
existence, are considered by Canada Revenue Agency (CRA) to be eligible
capital expenditures, and cannot be deducted in the same way as other
expenses. However, the Federal 2016 Budget introduced proposed changes
to eligible capital expenditures, and these expenditures will now be included in
a new capital cost allowance (CCA) class. See the eligible capital
expenditures article for more detail.
Capital Costs /
Capital Cost Allowance
Capital
costs, or fixed assets, such as land,
buildings, vehicles, machinery and equipment, computers, etc. are not fully deductible in the year
they are purchased. These
items will be recorded on your balance sheet as assets. For accounting
and tax purposes, you will write off a portion of their cost (except for land) each
year. This is called depreciation
or amortization for accounting purposes,
or capital
cost allowance (CCA) for tax purposes. The Income Tax Act specifies what rate can be used to write
off the fixed assets as capital
cost allowance, and the CCA will often differ from the depreciation recorded on
your financial statements. Land can never be written off as an expense
unless you are in the business of buying and selling land.
Capital cost allowance rates are often changing,
and some classes have accelerated CCA. Ask your tax advisor to help with
the categorization of your asset purchases.
Inventory
Inventory will be
written off against income when the goods are sold. Until that time, the
costs are recorded on your balance
sheet as inventory.
Prepaid Expenses
Prepaid
expenses will only be partly deducted in the year paid. The portion related to a future
fiscal
year will be expensed in that year, and recorded on the balance sheet as
prepaid expenses until then.
Accruals
Accruals
should be done at the end of the fiscal period to record costs which have been incurred but not paid. This
ensures that your costs are recorded for tax purposes, and that you claim your
GST/HST input tax credits at the earliest possible date.
Accrual
Basis of Accounting vs Cash Basis of Accounting
The above information regarding prepaid expenses and accruals describes
record keeping when the accrual basis of
accounting is used. Those people who are in a farming or fishing
business, or who are self-employed commission sales agents, are allowed by the Income Tax Act to use the
cash
basis of accounting, and record all revenues and expenses when the payment
is received or paid.
Financial Statements
Your income statement
and other financial statements
should be prepared according to "Generally Accepted Accounting Principles",
or GAAP. In order to accomplish this, you need to keep receipts and detailed
information about your expenditures, so they can be properly classified by you
or your accountant.
There are different accounting standards for different types of
organizations. Private corporations can choose to use the Accounting Standards
for Private Enterprises (ASPE), or International Financial Reporting Standards (IFRS).
See:
Costs of haircuts, dry-cleaning, most clothing and clothing
repair are not deductible business expenses. See the Tax Court of Canada
case Weber
v. The Queen.
Uniforms are added to capital cost allowance Class 12, which
has a rate of 100%. The half-year rule does not apply to
uniforms, or to most items in Class 12,
allowing 100% write-off in the year of acquisition.
For more information on capital cost allowance see our
article on Capital Cost Allowance, which
includes a link to Schedule II of the Income Tax Regulations, which sets
out the classes used for capital cost allowance.
Mixed Business and Personal Use
Items that can be expensed but are used partly for
business use and partly for personal use would be expensed according to the
percentage of business use. An example of this would be cell phone
usage costs. Capital items that are also use partly for
personal use would be capitalized at 100% of the cost, and depreciation
would be determined each year based on the % of business use. See, in
CRA's guide T4002, Personal
use of property under "Special situations" in Chapter 4.
If you are making a trip entirely for business purposes,
i.e. to earn business/professional income, then the related travel expenses,
as long as they are reasonable, should be deductible, subject to the 50%
limit on meals and entertainment. If you take time to do some personal
activities during that time the costs of the personal activities would not
be deductible. If the length of the trip is extended in order to add
personal activities (activities which would not have been considered were it
not for the business trip), then additional costs (hotels, meals, etc)
related to the trip extension would not be deductible.
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