Some of the key business deductions available to self-employed Canadian small business owners are related to business meals and promotional activities, automobile mileage and other expenses, and home office expenses.
Each of these categories of tax deductions available to Canadian self-employed business owners are based on “percentage of use” accounts. This means that only a percentage of the actual expense is attributable to your business, and therefore, only the expenses related to that percentage can be deducted.
These examples illustrate how to maximize deductions in each of the areas through percentage of use accounts:
1) Business meals and business promotion activities. Meals with your clients, employees, or those eaten at a restaurant during the course of business are eligible to be deducted at a rate of 50% according to the Canadian Revenue Agency (CRA).
However, if the meal is part of an event that is promoting your business, you can deduct them at 100%. In order to do this, it would need to be an event that incorporated an agenda and more than one or two employees or clients. It is critical that you keep a calendar of all such events and a detailed record of the associated expenses.
Keep in mind that the CRA states that “The maximum amount you can claim for food, beverages, and entertainment expenses is 50% of the lesser of the following amounts:
- the amount you incurred for the expenses
- an amount that is reasonable in the circumstances
These limits also apply to the cost of your meals when you travel or go to a convention, conference, or similar event.”
You should also take note of the special rules that apply to travel expenses and other stipulations related to meal deductions related to off-site events such as conferences. There are also special rules for long-haul truck drivers and the self-employed in the fishery industry.
2) Automobile mileage. The question often comes up for self-employed independent consultants and business owners about how to deduct their business mileage and use of a personal vehicle for business.
Keeping a detailed vehicle mileage and use log is critical in case you are audited by the Canada Revenue Agency. If you do not have these records, the CRA could reject your claims for automobile expenses and deductions. You will need to document each business trip, the destination you were going to, the reason for the trip, and the distance traveled by the vehicle throughout the year.
- The date of your trip
- Your starting point
- Your destination
- The purpose of your trip
- Your starting mileage
- Your ending mileage
- Total kilometers driven on the trip
There are also many mileage tracking apps on the market. These apps can make it easier to track your mileage.When a trip is over, you can classify it as a personal or business trip then download a report which can then help you record your total travel mileage for the tax year, including the percentage that were related to earning business income.
The percentage of the total number of miles driven for business will be the multiplier by which you can deduct expenses related to automobile use and expenses from your business income.
Here are some tips to make deducting your business mileage from your Canadian business tax return easier:
- Record your odometer reading at the beginning of the tax year, and at the end of the tax year.
- Should you change vehicles at some point throughout the year, make note of the date you changed and the odometer reading for the new or leased vehicle.
In addition, the CRA allows self-employed business owners to deduct eligible vehicle business expenses including: fuel, license and registration fees, insurance, loan interest, lease costs, maintenance and repairs. You can calculate the percentage of business use by multiplying these same costs by the percentage of business use as noted above.
If you have more than one vehicle, you will need to calculate the expenses separately for each one.
3) Home office and percentage of home use for business deductions for Canadian small business owners.
If you own your own home, you can claim the portion of your home you use for your business. However, to do this, the CRA requires that your business use must be more than ancillary. Similar to automobile usage for business, you must calculate the proportion of your home that is being used as office space.
You can do this by dividing the area of your home office by the total area of your home.Typically, the total business use percentage is between 20% and 33%.It is important not to overlook your garage and the square footage proportionate to the total percentage deduction. Add this square footage to your total percentage of common area living space (kitchen, hallways, etc.)
Consider also any capital gains deductions related to your home which can also be prorated according to the percentage of use that you establish above.
Other deductible home office/business use of home expenses include heat, electricity, water, home insurance, mortgage interest, cleaning supplies, property taxes, repairs, and maintenance. Standard office supplies such as printer paper, paper clips, pens, postage, ink cartridges, and even toilet paper for your office bathroom, etc. are fully deductible.
This summary of how to deduct business meals and promotional activities, automobile mileage and other expenses, as well as home office expenses as percentages of use for your small business is a high-level overview.
The CPA4IT team can help you set up expense categories in your chart accountants to align with these and other expense categories. We can also advise you on the eligibility of expenses to ensure you maximize deductions while remaining in full compliance with Canada Revenue Agency guidelines. Contact us today by clicking here.