Running a small business in Canada comes with its fair share of expenses. But did you know that many of these costs qualify as tax-deductible items for small businesses? Using small business tax deductions can cut your taxable income. This frees up cash flow for reinvestment.
Think of tax write-offs for small businesses as a reward for being organized and strategic with your finances. Proper tax planning can significantly impact your bottom line by maximizing deductions. This guide will explain what to write off on taxes as a small business owner in Canada. This way, you can keep more of your hard-earned money—right in your pocket!
What Are Tax Write-Offs?
A tax write-off, or tax deduction, is a valid business expense. You can subtract it from your total income to lower your taxable income. The lower your taxable income, the less tax you’ll have to pay. For small businesses, this can mean the difference between paying more in taxes or having extra cash to reinvest.
Important Note: Deductions reduce your taxable income, while tax credits directly reduce your tax bill. Both are valuable tools for saving money, but they work differently. For example, a $1,000 deduction may reduce your taxable income by $1,000, while a $1,000 tax credit would lower your tax bill by $1,000.
Common Small Business Tax Write-Offs in Canada
Here are some of the most common tax-deductible items for small businesses that Canadian business owners can claim:
Home Office Expenses:
• Rent or mortgage interest
• Utilities (electricity, heat, water)
• Home insurance
• Property taxes
• Maintenance costs
Working from home is common. If you run a business from a home office, you can deduct some of these home-related expenses, provided that the space is used exclusively for business purposes, or it is your principal place of business.
For example, let’s say 20% of your home is used only for business. You can deduct 20% of your rent, utilities, and other eligible expenses. Personal use can disqualify you from the deduction.
Vehicle Expenses:
• Fuel
• Insurance
• Repairs and maintenance
• Lease payments and interest on car loans (subject to CRA limits)
Do you use your car or truck for business, like deliveries, client meetings, or site visits? You can write off several of these vehicle-related expenses. If you use your vehicle 60% of the time for business, you can deduct 60% of your vehicle-related expenses. Keep a detailed logbook to track your business mileage. It’ll be a lifesaver during tax season and in case of an audit.
Office Supplies and Equipment:
Stocking up on office supplies like pens, paper, and printer ink? These everyday essentials are fully deductible. Larger purchases, such as new computers or office furniture, are small business deductible items in Canada. Larger assets may need to be depreciated over time using Capital Cost Allowance (CCA). If you buy a new computer for $2,000, you can claim part of that cost over several years through CCA. It depends on its classification and depreciation rate.
Software Subscriptions:
Accounting software, CRM systems—your subscription fees can add up. The good news is they’re fully deductible! If you pay $30 a month for cloud-based accounting software, that’s $360 you can deduct annually. Add in other subscriptions like G Suite, and the savings stack up.
Business Travel:
Attending conferences, meeting clients, or exploring new markets? Business-related travel expenses are deductible, including:
• Flights
• Accommodation
• Meals (50% deductible)
• Transportation (taxis, rental cars, public transit)
If you fly to Toronto for a 3-day business conference, you can deduct the cost of your flight, hotel, and 50% of your meals. Save all your receipts and document the business purpose of your trip.
Meal and Entertainment Expenses:
Taking a client to lunch or attending a networking event? You can deduct 50% of the cost of meals and entertainment related to your business. This is a common small business tax deduction. For example, if you take a potential client to a hockey game to discuss a project, you can deduct 50% of the cost of the tickets and any food or drinks.
Advertising and Marketing:
Advertising is key to growing your business, and luckily, those costs are tax-deductible items for small businesses. You can deduct expenses for online and print ads, website work, and public relations. However, any promotional expenses must be directly related to earning business income and properly documented.
If you spend $2,500 a year on online ads and another $1,000 on website maintenance, you can deduct the full $3,500.
Employee Salaries and Benefits:
You can deduct the following employee-related expenses:
- Salaries and wages
- Benefits
- Contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI)
If you pay an employee $50,000 annually and contribute $2,500 to their CPP and EI, you can deduct the entire $52,500.
Professional Fees:
What to write off on taxes when you hire a lawyer, accountant, or bookkeeper? Their fees! Consulting fees for business planning, marketing, and financial advice are also deductible. Hiring a lawyer to review a contract or a bookkeeper to manage your finances allows you to write off these professional fees.
Insurance Premiums:
Business insurance, such as liability and property insurance, is another deductible expense. These are crucial for protecting your business from potential risks.
Repair and Maintenance:
Keeping your equipment and business property in good condition is essential. These repair costs are deductible. If your business premises need repairs or your equipment needs maintenance, you can deduct the costs from your taxable income.
What Is the Small Business Tax Exemption in Canada?
The Small Business Deduction (SBD) is one of the most valuable tax breaks available in Canada. It is for Canadian-controlled private corporations (CCPCs).
This deduction allows CCPCs to pay a lower tax rate on the first $500,000 of active business income. In provinces like British Columbia, this deduction cuts the tax rate from about 27% to 11%. This saves eligible businesses a lot in taxes.
To qualify for the SBD, your corporation must meet specific criteria. It must be a CCPC and have active business income below $500,000.
It’s important to note that this deduction applies only to active business income, not passive income like investments.
Additionally, businesses that earn more than $50,000 in passive investment income may start to lose access to the SBD, with it being fully phased out for passive income over $150,000.
How to Maximize Your Write-Offs
To ensure you’re maximizing your tax deductions, follow these key tips:
- Keep Detailed Records: Organization is critical. Save all your receipts, invoices, and bank statements related to business expenses.
- Track Business Use Percentage: For expenses like your vehicle and home office, you can only deduct the portion used for business.
- Consult a Professional: Tax laws can be complex and ever-changing. A qualified accountant can help you navigate the rules, ensure you claim all eligible deductions, and optimize your tax strategy. They can also offer advice on how to structure your expenses to maximize savings, such as timing larger purchases before year-end.
How Can Small Businesses Pay Less Taxes in Canada?
Want to reduce your overall tax liability? Here are some smart strategies to pay less in taxes:
- Claim Every Eligible Deduction: Ensure that you claim all the deductions you’re entitled to, from home office expenses to vehicle costs and professional fees.
- Leverage the Small Business Deduction (SBD): If your business qualifies as a CCPC, take advantage of the SBD to lower your tax rate on your first $500,000 of active business income.
- Contribute to Pension Plans: Contributions to a company pension plan can reduce your taxable income. They also help you save for the future.
- Buy Before Year-End: If you plan to make big purchases, buy before the fiscal year ends. This will allow you to claim the deduction sooner.
- Defer Capital Gains: If you’re selling an asset that will result in a capital gain, explore options for deferring the gain to a later tax year. This could reduce your tax liability, especially if you expect to be in a lower tax bracket in the future.
Conclusion
Tax write-offs for small businesses are a powerful tool for saving money, but the real benefit comes from staying organized with your bookkeeping. Accurate records and tracking your expenses will help you maximize your tax deductions without stress when tax season arrives.
Want to learn more about bookkeeping for small businesses? Get in touch with us today! We can help you streamline your finances, clean your books, and achieve your business goals with confidence.
