If there’s anything that irks business owners, it’s paying the government more tax than they need to - and rightfully so! What I am going to discuss here is some commonly missed small business tax deductions that may not have even occurred to you - and why you should be thinking bigger than writing off a few expenses here and there.
Here’s a story I get a lot. “My friend told me that their accountant lets them deduct vacations to Mexico, their car and child care.” You may be thinking, “I must be a sucker,” or “I need a better accountant.”
Here’s how I respond: In the right circumstances, some of those things might be tax-deductible, or partially so. But, let me ask you this: are you trying to deduct personal expenses in your business, or is there a valid business reason for those expenses? Deep breath, ok -your friend may have misspoken or misunderstood what was exactly being expensed. They may have mixed up personal and business deductions or partial tax deduction in the case of travel.
Business tax deductions need a valid reason for the expense - there are no loopholes for us 99%ers - just cheating. That being said, you might not know all the small business tax deductions you could be making. So, here’s a list of expenses you may be missing on your tax return.
While You're Here, Take Advantage of Our Guide on How to File Your Return - Easily and for Free.
1. Home-Based Business Expenses
Many business owners operate from home, at least part of the time. If you do, you may be able to deduct a portion of your household expenses.
To qualify, your workspace must meet one of two CRA requirements:
- It is your principal place of business, meaning you conduct most of your business activities there; or
- It is used exclusively to earn business income, and you use it regularly to meet clients, customers, or patients.
If eligible, you can deduct a reasonable portion of expenses such as:
- Rent
- Utilities
- Internet
- Property taxes
- Mortgage interest
- Home insurance
The amount claimed is typically based on the percentage of your home used for business. Your calculation must be reasonable and supported by documentation. Check out our blog on Home Office Deductions to learn more.
2. Utilities, Phone, and Internet
Even if you are not claiming a full home office, you can still deduct the portion of your phone and internet that you use for business.
If you have a separate business phone or internet account, that is 100% deductible. If you are using a personal plan for both business and personal, you will need to split out a reasonable percentage for business use.
For commercial spaces, utilities like hydro, heat, and water are all deductible business expenses.
3. Vehicle Expenses
You can deduct vehicle expenses you incur for business purposes, but tracking them can be tricky. There are a couple of ways to go about deducting vehicle expenses. For small businesses, we generally recommend you keep any vehicle that you use for both business and personal use in your personal name. This will avoid some potential personal tax liability.
- The first way to do this (and simplest way) is to pay yourself a per-kilometre rate based on CRA’s current allowance rate. This ensures the payment is deductible by the business, but not taxed as income in your hands. You still must personally pay all the expenses such as maintenance, insurance and gas (no double-dipping: i.e. dipping the chip and then dipping it again). The limitation here is this is only an option when you are an employee of your corporation.
- The second way is to tally all of your vehicle expenses for the year and multiply by the percentage you used for business. For example, if you drove 10,000km during the year and 3,000km of that was for business, you could deduct 30% of your vehicle expenses for the year. Yeah, I know, it’s a big headache.
Both methods require that you keep a log of business use of your vehicle, and it has to be meticulously maintained, or the expense could be disallowed. Check out Mile IQ if you are looking for a simpler way than keeping a clipboard in your car.
Bonus tip: Driving to and from work does not suddenly become deductible if you are self-employed! If someone tells you they are deducting that, you can tell them they are doing it wrong!
We have a full in-depth guide on vehicle write-offs if you want to learn more.
4. Research and Development
Ok, this is admittedly a big undertaking, but there are some serious tax credits to be had if you qualify. I won’t write a book on this here as there are a lot of resources out there on the information superhighway, but if you qualify and are not taking advantage of this small business tax deduction … there are no words.
5. Meals and Entertainment
Taking a client out for lunch, or coffee with a prospect? Those meals are 50% deductible.
The CRA figures that meals and entertainment have a personal benefit too, so you only get to write off half the cost.
There are a few exceptions where you can claim 100% – like team holiday parties or meals provided at remote work sites. For most business meals it is 50%.
Keep your receipts, and make a note of who you met with and why, in case the CRA ever asks.
We also have a full guide on meals and entertainment deductions if you want to check it out.
6. Travel Expenses
If you travel for business, you can deduct the cost of transportation, hotels, and 50% of meals while you are away.
This could include attending a conference, meeting with clients in another city, or checking in on a branch office. Flights, hotels, taxis, and even Uber rides for business trips can all be written off.
The key is that the trip needs to be primarily for business, not personal. If you tack on a couple of vacation days, you will need to split out the personal portion.
The CRA also limits convention fees to two per year, and they have to relate to your business or profession.
And again, we’ve included an in-depth guide on travel write-offs if you want to learn more.
7. Salaries, Wages, and Benefits
If you have employees, the wages you pay them are deductible. That includes not only their salaries but also the employer’s share of CPP, EI, and any benefits you provide.
If you are incorporated and you pay yourself a salary, that is deductible too. Just make sure you are actually running payroll properly with source deductions and T4 slips filed at year-end.
You can also deduct payments to contractors, as long as the payments are for legitimate work and at reasonable amounts.
If you’re new to the topic of payroll, we’ve got a payroll guide for you.
Pro tip: If you’re thinking, “Do they have a guide on that other thing too?” … yes. Yes, we probably do.
8. Advertising and Promotional Material
Spending money to attract new customers? Those costs are also deductible.
This can include online ads like Google or Facebook, website hosting, social media promotions, sponsorships, or even old-school ads in newspapers or radio.
Just make sure the expenses are directly tied to your business and are reasonable for what you are trying to achieve.
9. Software and Subscriptions
Almost every business uses software these days. The good news is that subscriptions to accounting software, project management tools, cloud storage, CRMs, and even e-commerce platforms like Shopify are deductible.
Most software these days is subscription-based, so you deduct the full cost each year. For larger one-time software purchases, sometimes you will need to write them off over time like a capital asset.
10. Capital Assets (CCA)
When you buy big items like computers, office furniture, or major equipment, you usually do not write off the full cost in the year you buy it.
Instead, you claim depreciation through something called Capital Cost Allowance, or CCA. The CRA has specific rates for different types of assets. For example, computer equipment can be depreciated faster than furniture.
This helps spread out the deduction over the useful life of the asset.
11. Interest and Bank Charges
If you borrowed money for your business, the interest on that loan is deductible. That includes business lines of credit, loans for equipment, and even credit card interest if it is tied to business purchases.
Just make sure the borrowing was for business purposes. If the loan was partly for personal use, you can only deduct the business portion of the interest.
You can also deduct regular bank fees on your business accounts and merchant fees from payment processors like PayPal or Stripe.
Payment processing fees are typically charged to the business owner at a rate of about 3% of the transaction total. This is the unfortunate truth about accepting credit card payments for your goods or services, but the good news is that those transaction fees are also tax deductible.
12. Charitable Donations
If you have made a charitable donation through your business, that is a small business tax deduction you can claim in your next tax return. Must make sure your charity is a registered Canadian charity — they should issue you with a receipt upon donation. Keep this receipt to make the expense claim. If the CRA asks for proof, you want to make sure you have it to hand!
You Might Be Thinking Too Small
I understand there is a huge worry that you may be missing out on some small business tax deductions — that is fair — but did you know the government also offers some massive incentives to build a successful business. It’s called the Lifetime Capital Gains Exemption, and as of this year is worth $848,252 in tax-free money. As you might expect, there are some hoops to jump through, but basically, if you can build up a business and sell your shares to another party, the gain may be eligible for this exemption. It’s a great incentive to build up a business that has value.
While it’s tempting to focus on saving a few dollars here and there, you are better spending your time focusing on scaling your small business. Hiring a professional accountant is a great way to ensure you are getting the deductions you deserve, so you can focus on what you do best — growing your business.
