Canada Small Business Tax Deductions: Qualifications and Requirements

Canada Small Business Tax Deductions: Qualifications and Requirements

Small business owners are always looking to save money, including with taxes. The government wants to stimulate business activity, so they allow Canadian businesses to deduct certain expenses from their tax returns. 

Many business owners know about simple deductions like office supplies, but there are several more to consider. Today, the team at Group Enroll is here to explain Canada small business tax deductions and how they can help your business.

How Do Tax Deductions for Businesses Work?

Tax deductions for businesses work the same way as they do for individuals. The Canada Revenue Agency (CRA) allows companies to subtract expenses from their taxable income, lowering the total amount of taxes they must pay. Many businesses take advantage of deductions to drop income brackets, further reducing the amount of tax they have to pay. 

Tax deductions are different from tax credits. Tax credits directly lower the amount of owed taxes, while deductions reduce the income you pay taxes on. Tax deductions can potentially save thousands on taxes for businesses, so it’s important to take full advantage of as many as possible.

Small Business Deduction

The small business deduction (SBD) is a tax deduction specifically for Canadian-controlled private corporations. The SBD provides Canadian-owned small businesses with a tax reduction on qualifying profits. 

The SBD taxes small business profits at an effective rate of 9% rather than the typical corporate rate of 15%. Individual provinces may also have further small business tax deductions. To qualify for the deduction, a small business must:

  • Be a privately owned corporation that does not sell shares on the stock market
  • Be a Canadian corporation or reside in Canada
  • Not be controlled by non-residents or publicly owned corporations

Businesses that hold up to $10 million in taxable capital can get a reduced tax rate on the first $500,000 of business income. Businesses with more than $10 million in taxable capital have reduced limits as follows:

Businesses with more than $15 million in taxable capital are not eligible for the SBD. Canadian law defines business income relatively loosely as any of the following:

  • Income from business activity
  • Income that is incidental from business activity
  • Income from concern in a trad

In other words, as long as the income is from business activity and not investments or personal service, you can claim it as business income.

Other Tax Deductions for Canadian Businesses

Generally speaking, businesses can deduct certain types of business and operating expenses. It is crucially important that businesses keep thorough records of all expenses so they can provide proof if the CRA requests additional information. Below are some of the most common Canada small business tax deductions.

Accounting and Legal Deductions

Businesses can deduct any fees from external accounting, legal, or consulting services. You can also deduct any tax filing fees. Note that legal fees from purchasing capital assets (e.g., vehicles, machinery, etc.) do not count as legal fees for deductions and instead count towards property and asset deductions.

Advertising Deductions

You can deduct most advertising and marketing fees from your taxable income, provided they do not provide an enduring benefit to your business. For example, you can’t deduct expenses for website development because a new website provides an enduring benefit for the company.

Depreciation Deductions

Canadian businesses can also deduct depreciation from business assets—things like computers, vehicles, furniture, fixtures, and more. The CRA has a specific formula for calculating capital cost allowance from depreciating properties you can claim. You cannot claim the entire value of an asset for depreciation and can only deduct up to half the current value of the asset. 

The Accelerate Investment Incentive allows companies to deduct higher depreciation amounts for specific types of environmentally-friendly equipment and materials. The new legislation applies to equipment procured after 2018.

Charitable Donation Deductions

The CRA also allows businesses to deduct charitable donations. You can only deduct donations to Canadian charities and must provide receipts of the transaction. You can deduct any kind of assistance to charitable organizations, whether it’s cash from directly giving or mileage from vehicle assistance.

Office Expenses Deductions

Office expenses are one of the most common types of Canada small business tax deductions. Self-employed people who primarily work from home can deduct a portion of their mortgage, property taxes, maintenance costs, and home insurance costs. The total amount of allowable deductions depends on the relative size of the office space compared to the total space of your home.

Insurance Deductions

Businesses can also write off premiums for qualifying insurance types. For example, you can claim premiums from property insurance, liability insurance, life insurance, and business interruption insurance. Business owners can only claim life insurance premiums if they have a business loan with their life insurance as collateral.

Bank Charges and Interest Deductions

Business owners can write off banking fees for their business account, as well as any interest on loans for business activity. Keep in mind that rentals and employee salaries do not count as bank chargers and have a separate section for claiming deductions.

Rent Deductions

If you rent office space for work, you can deduct rental payments on your annual tax return. Because office rent is purely a business expense, most businesses can write off all rental payments they made that year. As such, businesses should keep thorough documentation of rental payment receipts and contracts in case the CRA requests more information.

Food and Entertainment Deductions

A little-known deduction is that Canadian businesses can deduct up to 50% of the cost of business-related food and meals, provided they have receipts for the purchases. Small businesses can claim all food and entertainment costs for up to six business events or parties each year.

Maintenance and Repair Deductions

If maintenance and repair work goes to increasing business earnings, you can claim them on your tax returns. However, you cannot claim labour or expenditures for which your insurance company reimburses you. Property upgrades and additions do not count as maintenance or repairs for tax deduction purposes.

Vehicle and Travel Deductions

If you use your car or another vehicle for business activity, you can deduct all vehicle-related expenses from your taxable income. Vehicle expenses you can deduct include:

  • Repairs
  • Gas
  • Insurance and registration
  • Tolls
  • Depreciation 

You can also deduct mileage from the distance you have travelled in a business-related vehicle. The 2022 CRA mileage rate allows you to deduct 61 cents per kilometer for the first 5,000 kilometers and 55 cents for every further kilometer.

Wage Deductions

Wages and salaries are other major categories of tax deductions for small businesses. When you submit your tax returns, you will also include T4 forms that report all employee income, employee insurance payments, and payroll expenses. The amount of payroll expenses you can deduct depends on the size of your business and your province. 

Entrepreneurs who are employees at their own corporations can report their income as employment income. If an entrepreneur controls more than 40% of the corporation, they cannot deduct insurance costs.

How Do I Claim Small Business Tax Deductions?

Canadian corporations fill out CRA form T2125 to claim deductions on taxable income. Part 4 of the document has lines where you can report the total business expenses you wish to deduct from your taxable income. For example, line 9060 is for reporting deducted salaries, wages, and benefits. Line 9200 is for deducting qualifying travel expenses. 

Parts A through F on the form are for deducting capital property and assets, while part 7 is for self-employed people to deduct home office expenses. When filling out the returns, make sure that you list deductible amounts under the correct section. Depending on what you claim, the CRA may contact you for more information about business expenses. 

The CRA takes tax fraud seriously, and falsely reporting illegitimate Canada small business tax deductions can incur a financial penalty equal to 50% of the overstated deduction or $100, whichever is larger.

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