Discover whether you can claim business expenses on your tax forms even if your business did not generate any income last year.
For Canadians with one source of employment income, tax laws, forms, and procedures seem relatively straightforward. However, once you own a business and draw a salary, the rules become a little more complicated. As a result, many first-time business owners often ask, “Can I claim business expenses without income in Canada?” Keep reading to find out.
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Can I Claim Business Expenses Without Income in Canada?
If you run a legitimate business, you can claim business expenses even if it does not generate any income. The Canada Revenue Agency (CRA) presumes that all business entities will show some form of income. However, the CRA also understands that it takes time for businesses to establish revenue streams and become profitable.
As long as your business generates a small amount of income, you can always claim business expenses on your income tax forms.
For instance, a gardener may maintain a home office and cultivate a small book of business that primarily consists of friends, family, and neighbours. That gardener can claim business expenses like the cost of office supplies, gasoline, and replacement parts for gardening equipment.
What If My Business Runs at a Loss?
Many businesses fail to turn a profit during their first year because the startup costs outstrip all income. The owners of these unprofitable businesses can legally claim business expenses on their taxes. Too many down years in a row may invite the suspicion of the CRA, though.
The CRA sees millions of tax returns every fiscal year, including thousands that reflect annual losses for businesses. For that reason, you can claim business expenses even if you earned no income, and the CRA will probably not flag your tax filings for an audit. They may take a closer look at the legitimacy of your business if you claim business expenses and operate at a loss for a few consecutive years.
Unlike sole proprietorships and other small businesses, you can not claim corporate losses on your income taxes. Some of the other types of small businesses that the CRA allows you to claim losses on include partnerships and cooperatives.
Businesses vs. Hobbies
Can I claim business expenses without income in Canada? That depends. The CRA makes a distinction between small businesses and hobbies. You can claim business expenses without showing any income during down years under various circumstances. However, costs incurred during the pursuit of a hobby are not deductible.
Factors the CRA Considers
The CRA allows you to deduct business expenses if you:
- Operate your business in a professional manner
- Have generated business income in previous fiscal periods
- Depend on your business as your primary source of income
- Put time, money, and effort towards making your business profitable
- Fail to generate income due to unforeseeable circumstances
Proving You Run a Business Rather than Pursue a Hobby
To protect against the possibility of an audit, you should maintain exhaustive records of your expenses, including any proof that you incurred them in an attempt to turn a profit. This practice becomes especially important if your business does not generate income and you wish to write off any expenses on your personal tax returns.
Some of the records that you should keep include:
- Calendars — Record the hours consumed while managing your business
- Task logs — Specify the individual business activities carried out each day
- Industry blueprints — Proof that similar, successful businesses had no income at first
- Proof of advertising — Copies and screenshots of advertisements that you purchased
- Business plan — Maintain a wholly original, detailed business plan
Writing Off Business Expenses Against Other Forms of Income
As long as the CRA treats your activities as a business rather than a hobby, you can claim business expenses even without income in Canada. Essentially, you subtract the amount of your business loss from employment income, investment income, or income generated from other businesses that you run.
Lack of Other Sources of Income
Suppose you do not have any other employment, investment, or business income. In that case, you cannot claim your business expenses on your taxes because you have nothing to write them off against on the forms.
Business Losses Greater Than Other Sources of Income
If your business losses outpace your other forms of employment, investment, or business income, you can only claim business losses equal to the amount of your other income. In some cases, you can claim the remainder of the losses on tax filings for previous and subsequent tax years.
In Canada, you can carry over business losses for the following seven years. Alternatively, you can retroactively apply the losses to tax returns filed during the previous three years.
Another strategy involves not claiming business losses. Instead, you can save them to minimize an even bigger tax bill in the future or recoup taxes that you already paid during the previous three years.
Can I Write Off Business Losses on My Taxes Indefinitely?
Unfortunately, you can not claim your business losses on your tax returns forever. A few consecutive years of business losses will likely draw the attention of the CRA. According to the Canada Revenue Agency, all businesses must have a “reasonable expectation of profit.” That means you need to find ways to increase income and reduce costs over time.
If you do not turn a profit for several years in a row, the CRA may reevaluate your business and determine it to be a hobby. The major drawback of such a determination is the reassessment of losses that you claimed in the past, resulting in a new tax burden for previous fiscal years.
Is Your Business Legitimate in the Eyes of the CRA?
Aside from conducting business with the goal of turning a profit, your business must also carry out activities that are “clearly commercial in nature.” If you hold down a full-time job and run a small business on the side, you should take great care to generate as much income as possible to claim business expenses without scrutiny from the CRA.
For instance, suppose a person works 40 hours a week as an employee and runs a small chauffeur business on the side. The business purchases a vehicle but can not drum up a single customer. The business owner uses the vehicle every week to visit the grocery store and attend a place of worship. The individual claims the vehicle’s depreciation on his personal income tax forms.
In the above example, the CRA would likely consider the business illegitimate because the individual already has a full-time job, uses business assets exclusively for personal use, and his activities do not appear “commercial in nature.”
Types of Business Expenses That You Can Claim
As a business owner, you’ll incur plenty of expenses that you can claim on your tax returns. Some of the most common deductible expenses include:
- Startup costs — Expenses incurred prior to business operation but within the same fiscal year
- Taxes, fees, licences, and dues — Business taxes, government licencing fees, etc.
- Rent — Applies to land and buildings used for your legitimate business activities
- Supplies — Items necessary to carry out business in pursuit of profit
- Use of home office — A percentage of your home’s square footage
- Travel — Claim up to half of all meals and entertainment during business trips
- Utilities — Write off power, gas, water, and cable if you used them to generate income
- Advertising — Recoup TV, radio, print, and internet advertising costs as write-offs
Are Insurance Premiums Deductible in Canada?
If you find yourself asking, “Can I claim business expenses without income in Canada?” the answer is yes in some cases. Give yourself a tax write-off and keep your employees happy and healthy while doing it! In Canada, premiums for life insurance and supplemental coverage for provincial health insurance remain tax-deductible as long as they represent a reasonable business expense.
Receive a free online insurance quote from Group Enroll today! You can also contact our team with any tax-related questions by emailing us at firstname.lastname@example.org or sending a letter to 10 Great Gulf Drive, Unit 5, Vaughan, ON, L4K 5W1.