Let’s learn about small business deductions, what’s generally deductible, common deductions, and requirements for retaining documentation to support your deductions.
Deductions
As a self-employed individual, you can reduce your tax burden by ensuring you understand what deductions you’re entitled to claim. A deduction reduces your income and the CRA calculates personal tax based on the reduced amount. The lower your income, the lower your tax burden.
What’s Deductible?
At a conceptual level, any expense you are incurring for the purposes of earning business income is generally deductible for tax purposes. There are, of course, always exceptions. Notable ones include only 50% of meals and entertainment are deductible for tax purposes, green fees or membership fees in a golf club are not deductible at all, and items purchased that are capital in nature (think: equipment) are only deductible in accordance with the CRA’s prescribed capital cost allowance rates.
Common Small Business Deductions
- Advertising and promotion
- Meals and entertainment (generally 50% deductible)
- Insurance
- Interest and bank charges
- Licenses, memberships, dues
- Office expenses
- Office stationery and supplies
- Professional fees (including legal and accounting)
- Management and administration fees (brokerage transaction fees)
- Rent or home off ice
- Repairs and maintenance
- Salaries, wages and benefits
- Travel/vehicle expenses
- Capital cost allowance (on capital assets)
Check out the CRA’s website for additional examples and if you run your business from home.
Organization
Make sure you have a system in place to keep track of business expenses as you’re incurring them, including keeping copies of the supporting receipts and invoices.
Why do you need to keep receipts?
In Canada, we operate on a self-reporting income tax system. This means you report your income and expenses to the Canada Revenue Agency (CRA). The CRA will generally assess your return based upon what you file. Their agents then review and may request supporting documentation from a sample of taxpayers across the country. This serves to maintain the integrity of our self-reporting tax system.
Pre-assessment reviews
Sometimes prior to assessing the return, the CRA will conduct a “pre-assessment” review to request that you provide supporting documentation for an item reported in your return. You generally have 30 days to reply to a pre-assessment review.
Post-assessment reviews
Sometimes, after the CRA has assessed your return, they’ll perform a “post-assessment” review to request supporting documentation. This again helps the government to ensure the integrity of the tax system as a whole.
How long do you need to keep documents?
You must maintain supporting documents for six years from the end of the last tax year they relate to, as required under the Income Tax Act. Destroying records without the CRA’s written permission can result in prosecution under the law.
How can you keep records?
You can store paper copies as was typical in the past. However, you’re legislatively permitted to keep records electronically, provided they’re retained in a readable format. Thanks to technology (especially cloud-based), this is the preferred and recommended practice.
Regardless of how you decide to keep your records, ensure that you have mechanisms in place to ensure their safety. If paper, keep them in a dry, fire-proof area that minimizes possible fading. If electronic, ensure there’s a backup (multiple back-ups) in case of equipment or software failure.
Electronic recordkeeping applications
Common cloud-based applications for storing electronic records are Dext and Hubdoc. They easily capture and store data and integrate into Quickbooks Online and Xero bookkeeping software.
Go the extra mile
To help substantiate an expense questioned by the CRA, maintain a description of how the expense related to your business activities. For example, for a meal receipt, record the names of who attended and the purpose of the meeting. For example, “Emily and Joe Brown-prospect meeting.”
Make sure you capture every small business deduction you’re entitled to and maintain clear records and supporting documentation for easy retrieval. If you need help or guidance, feel free to reach out to Compass CPA. We’re here to help.
