Business Deductions to Keep Top of Mind During This Tax Season
April 04, 2023
With the increase in inflation and interest rates that Canadians have experienced in the past year, it is no wonder that business owners may be looking for ways to weather this very expensive storm.
Please refer to our recent article What You Need to Know for the 2022 Tax Season for easy reference to 2022 tax changes, including:
- Changes affecting homeowners and prospective homeowners;
- Changes to medical deductions;
- COVID-19 benefit payments;
- Air quality improvement tax credit;
- Labour mobility deduction; and
- Critical mineral exploration tax credit.
Here, we share some other business deductions to keep top of mind as you go through your annual tax cycle.
Motor Vehicle Expense Deductions
Canadian business owners who use their motor vehicle for business purposes may be eligible for tax deductions. Limits and qualifications do apply, but with proper documentation, the Canada Revenue Agency (CRA) will allow the following 2022 automobile allowance rates:
- $0.61 per kilometre for the first 5,000 kilometres driven;
- $0.55 per kilometre after that first 5,000; and
- An additional $0.04 per kilometre applies for travel in the Northwest Territories, Yukon, and Nunavut.
Self-employed business owners who use their vehicles for work can deduct the mileage they drive for business purposes on your taxes, and if they use their car solely for business purposes, they can claim all car-related expenses for the year. However, if they use their car for both personal and business driving, they can only claim a deduction for the portion used for business. This includes things like registration fees, fuel and oil costs, insurance, interest on loan payments, and even maintenance and repairs.
Be mindful of keeping a log of your business travel that includes: date, starting location, destination, kilometres traveled, and the business reason for the travel. There are some great apps available to help keep you onside with CRA including Tallie and MileIQ. Note that many accounting software packages - like QuickBooks and Xero - also have mileage and expense tracking functions to help keep your expenses organized and allocated properly.
Meals and Entertainment
As a business owner in Canada, you may be eligible for deductions when it comes to meals and entertainment expenses. If you’re using these costs as part of your business operations, such as when entertaining clients or employees, you can claim up to 50% of the expense and deduct it from your total income for tax purposes. The meals and entertainment must relate directly to your business operations in order for you to qualify for this kind of deduction. Moreover, the CRA generally defines “entertainment” as simply any social activity that involves food or beverages – this could include going out for dinner with colleagues, buying tickets to a show, or even attending a sporting event – anything that provides an enjoyable experience in relation to your business dealings.
Capital Cost Allowance
Some of the most important industry-specific deductions for businesses involve capital cost allowances (CCA), which allow businesses to deduct the depreciation of certain assets – such as machinery, buildings, furniture and software – over multiple years to reduce the total amount of income tax. Business owners should also be aware of the non-capital losses deduction, which allows them to use losses or those from past years to offset income in the current or future. Discovering which specific deductions are applicable to your company will help business owners reduce their taxable income in a legally compliant manner.
Research and Development
The Canadian government offers a range of tax credits and deductions for businesses performing qualifying research and development (R & D) activities. Canadian companies can earn up to 65% of wages paid as refundable tax credits. Furthermore, there are deductions for wages paid to staff and amounts paid to contractors working on R & D projects as well as deductions for materials used in research-based activities. Additionally, there are tax credits available for expenses related to apprenticeship programs or work placements completed by employees of Canadian companies.
The Most Important Thing to Keep Top of Mind This Tax Season
These are just a handful of the business deductions available to Canadian business owners – and your accountant will know them all, inside and out. Bear in mind that the Canadian tax system uses general guidance when it comes to the deductibility of most expenditures. There are specific rules around the expenses noted above and some others, but the general rule is that if you’ve incurred the expense for the purpose of earning income from a business or property, the expense is likely deductible.
Working with an accountant can save you significant time, money, and stress while ensuring that you maintain full compliance with applicable laws. Your accountant can provide the sound guidance you need to maximize deductions or minimize your tax burden, as well as ensure that all details are timely and accurately reported. Additionally, having someone experienced in tax law review your books regularly helps you stay ahead of any potential problems, allowing you to stay focused on meeting your business goals. Not only during tax season, but all year round.
The Integrated Advisory Network consists of progressive CPA firms, along with best-in-class professional advisors, service, and product specialists, who work together to deliver an elevated and holistic client experience. One that optimizes both their personal and professional lives with an integrated financial strategy designed to help clients reach their goals.
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