Finances are one of the most important factors to consider when starting a new business. You need to consider expenses, monthly budgets, financial projections, funding, and especially taxes. Unfortunately, when starting a business, it is hard to take advantage of all the credits and small business deductions that you are entitled to when you are not aware of what deductions are out there.
Small business deductions reduce the corporate income tax that your corporation or small business would otherwise have to pay. In conjunction with the many tax deductions and write-offs you can claim, you can save significantly as a business owner by claiming them and hence, lowering your taxes.
Below, we cover what you need to know about the small business deduction along with a listing of other business deductions that you should be aware of.
Small Business Deduction
In Canada, there is a tax credit, known as the Small Business Deduction, which lowers the amount of taxes you have to pay to the CRA as a corporation. Incorporated companies can be taxed at both the provincial and federal level.
At the provincial level, specifically, there are two rates – a higher and a lower rate, which business owners can claim. Corporations can claim the lower provincial tax rate if they are eligible for the Small Business Deduction.
Who is Eligible for the Small Business Deduction?
To qualify for the Small Business Deduction, you must be a Canadian-controlled Private Corporation (CCPC). A CCP is defined as a private corporation, whose shares are not listed on a stock exchange, that is both established by a resident of and incorporated in Canada, and that is a corporation that is not controlled by a non-resident person, a public corporation, or both. A qualifying corporation must also earn income from actively conducting business.
If you have associated corporations, an agreement must be filed in order to share the small business deduction. If not, you could lose out on the entire small business deduction. This filed agreement for associated corporations ensures that one person does not take advantage of opening multiple corporations under one business to exploit the deduction.
Limits for the Small Business Deduction
There is a limit of $500,000 of your business’ annual taxable income when applying for the Small Business Deduction. In other words, you can claim only up to that amount for the deduction regardless if your business’ income is above $500,000.
There is also a taxable capital business limit reduction for companies that make over a certain amount of income. The Small Business Reduction rate becomes phased out or reduced for CCPC’s with more than 10 million in taxable capital employed in Canada in the previous year. It is eliminated completely for companies with more than 15 million in capital in the previous year.
How is Small Business Deduction Calculated in Canada?
As of January 1, 2020, the Ontario Small Business Deduction rate is 3.2%. Your deduction is calculated by multiplying your small business income for the year by the small business deduction rate of that year, which should result in a lower tax rate.
Every year you should check if there are any changes in the lower rate of Ontario corporation income tax. If there are, your calculations will need to use the number of days for which that rate applied. Always check with a certified accountant to calculate the correct dedication amount.
Small Business Expense Deductions
Any business that generates an income must provide documentation for any expenses they wish to claim for income tax purposes. If the expense is common for your industry and is a necessity to running your business, you can deduct them. Here are some business expenses that you should be aware of.
What Qualifies as a Small Business Expense?
Rent for Office or Business Space
As a business owner, you can claim the rent you pay according to the commercial lease that is set up for the property, building or land that are being used for the operation of your business. If you work from home, you can also deduct a portion of your rent, which should be claimed as business-use-of-home expenses.
If you pay property taxes for the building or land upon which your business is operating, these can also be deducted. This also applies to any home space you are using for your business. Again, it must be claimed as a business-use-of-home expense.
Office Expenses, Business Costs, and Supplies
Anything you buy and use for your business is an expense you can deduct. This expense category includes regular everyday office supplies, such as pens, paper, stamps, printers, computers, furniture, stationery, etc. If your business is medical in nature, you can claim equipment, medical supplies, and drugs. For businesses that rely on shipping out products, you can claim the business costs of delivery and freight fees incurred in the year.
When claiming deductions for your startup business, the deductions would have to occur in a fiscal period. Startup costs, however, may or may not be deductible depending on when they occur – if they were incurred before you started your business or whether the expenses happened after your business began.
As a new company, you must be clear about the date on which you officially started your business in order to file your claims. Consult with an accountant before making any claims.
Licenses, Subscriptions, and Memberships
You may be required to register for certain associations, memberships or upkeep a license to continue running your business. These you can claim a deduction for, whether it be an annual, membership, or subscription fee.
Services and Maintenance
Service expenses you can deduct include things such as telephone and internet services. If you use the internet or phone lines to run your business, you can claim all or some of the costs you have on a monthly basis.
Your utilities, like gas, electricity, water, cable can be deducted if they were required to run your business to generate income.
Maintenance and minor repairs that are done on your business property can also be claimed.
Employee Salaries, Wages, Benefits
As an employer, you should know that an employee’s wages are also a business expense that can be claimed. You can deduct gross salaries, workers’ compensation amounts, and employer contributions to pension plans and insurance policies.
Any premiums paid for an employee, such as those for a sickness, accident, disability, or income insurance plan, can also be deducted.
Professional Service Fees
You can also claim deductions for accounting, legal,and professional fees incurred for your business. For instance, you can claim the fees for professional assistance from a financial lawyer who helps with bookkeeping and filing income tax, or a corporate lawyer you have hired for business consultations.
As a business owner, you can deduct up to 50% of travel expenses that have been paid for business development, such as costs for public transportation, hotel accommodation, and meals. The 50% limit also applies to the cost of meals, beverages, and entertainment when traveling, and when they are consumed while on an airplane, train, or bus and not included in the ticket price.
Advertising – Online, TV, and Print
Any online advertising costs you incur is fully deductible, including the cost of your website domain name registration and web hosting fees.
For TV stations that advertise, they must be Canadian-owned to be considered for a full deduction.
If your print advertising is aimed at Canadians and 80% of it is editorial (journalistic) content, you can deduct all expenses paid for magazine, newspaper, and print media.
Bad Debts for Accounts Receivables
There is also a claim that you can make on bad debts (defined as money that is owed to you that you cannot collect). This is for any accounts receivable that you previously included as income and determined was a bad debt for the year in which it incurred..
Vehicles used for Business Purposes
For businesses that require the use of a vehicle, you can deduct expenses like gas, insurance, registration fees, and any necessary maintenance. This also includes parking fees, toll charges, registration fees,
To make those claims, you can itemize all costs and list them as deductions, or take the automobile allowance rate for the number of kilometres you drive, which must be logged accurately.
If you provide an employee with a vehicle that is also used for personal use, it is considered a taxable benefit and must be reported as a standby charge. This does not apply for cars that are specifically driven for company business and are returned to the company at the end of the day.
Any commercial insurance premiums you pay on buildings, equipment or machinery that are used for business purposes can be claimed as a deduction.
You may be able to claim a part of the premiums you paid on your life insurance, but only if you used it as collateral for a business loan.
Insurance that is related to a home business or paid on vehicles must be claimed as a business-use-of-home expense and motor vehicle expense respectively.
Meals and Entertainment
If you take business clients out to dinner or for a show, you can claim up to 50% for the meal and entertainment expenses.
You can deduct costs associated with tickets and entrance fees to events like entertainment and sport events, fashion shows, hosting parties (up to a limited number), even gratuities, tour guides, and room rentals.
Note that you cannot claim this expense if you charge the client for them.
Interest, Bank Charges and Fees
The interest on business loans you can be deducted. This applies to:
- Fees paid to reduce loan interest rate
- Penalties or bonuses charged by financial institutions to encourage the speedy repayment of a loan.
- Interest on a property used for business purposes.
- Interest paid on a loan made against an insurance policy.
- Standby charges, guarantee and service fees (deductible in full only for the year they were incurred).
- Any fees charged for loans used to buy or improve a business property (deductible over a period of five years).
Wages for Family Members
It isn’t uncommon for a business to include family members. If you have a spouse or child working for the company, you can also take advantage of income splitting and thereby lower your net income, and hence, your tax bracket.
You can deduct salaries you pay to children and your spouse as long as you can accurately record it to make the claim.
While your business can take advantage of Canada’s Small Business Deduction tax credit and many other small business expenses, it can also mean that there are other costs that are not qualified for a tax claim.
As many of these small business deduction expenses can easily overlap, be excluded or missed. Consult an OMQ Law small business lawyer to take a close look at your business and find out what else you should be aware of.