If your company operates even a single vehicle for business purposes, or if you sometimes spend money winning sales and new contracts, it’s essential to keep really accurate records of your expenses to back up the deductions you plan to claim at the end of the year.
The Canada Revenue Agency (CRA) may not accept certain deductions if you’re not able to prove your claims. To make the most of your tax deductions, what proofs do you need and what can you claim?
Tracking mileage for tax purposes is critical for a variety of employers and employees. Tracking your mileage correctly has implications on your income and taxes.
Logging your mileage
Use a logbook to track the miles you’ve traveled for business. Note the odometer reading when you begin using your personal or business vehicle for business travel, as well as the miles traveled each time you use that vehicle for business. At the end of the year, subtract the car’s final odometer reading from the beginning reading to find your total mileage for the year.
Calculate total miles traveled for business purposes by adding the mileage from your log book. Then, divide your business miles by the total miles driven to find the percentage of time your vehicle was used for business. This figure is the percentage of total vehicle expenses that you can write off come tax season.
Why do you need to keep a mileage log?
Without a mileage log, you have no way to prove how much driving was for business or personal purposes. This also means you can’t claim this deduction.
There are several ways to keep track of your vehicle mileage, such as a notebook dedicated to just vehicle mileage or a spreadsheet. However, a mileage tracking app allows you to easily track this information in a streamlined manner. However you choose to maintain records, remember you must hold on to all of your business records, including logbooks, for no less than six years. To simplify this process, you can also take advantage of the CRA’s simplified system for mileage deductions.
How to report your mileage
Self-employed individuals can claim a deduction for mileage and vehicle expenses, as can partners in a partnership. This deduction is declared in part 4 of the T2125 Form. For partnerships, this deduction is declared in part 6 of the T2125 form.
Taking clients and vendors out for food and drinks is a regular business practice in Canada, and the CRA lets you deduct much of the cost of this on your taxes. Entertainment expenses are often harder to verify than mileage-related expenses, which makes accurate tracking all the more important here.
Treating customers, clients, vendors, and other business contacts to meals, concerts, and sporting events is a common practice. Where you can write these items off at tax time depends on what counts as entertainment. If you are self-employed, you can claim these expenses as deductions if you’re able to prove that the expense is directly related to earning your income.
What counts as entertainment?
Many things count as entertainment. According to the Income Tax Act, entertainment includes amusement, recreation, and “enjoyment of entertainment.” Some of the more obvious expenses that qualify as entertainment are concert or sporting event tickets, renting a suite, cruises, admission to a fashion show, and other form of entertaining guests.
Other expenses covered under the umbrella of entertainment aren’t quite as obvious but are still claimable, such as:
- Cover charges
- Business vacations
- A security guard or escort
- A tour guide for an out-of-town client
What doesn’t count as an entertainment expense?
You can’t claim a deduction for costs or dues associated with the use of a recreation facility, such as a spa or tennis club. While you can claim a deduction for the costs of tickets to a baseball game, you can’t claim a season pass. However, if you can successfully prove that the season pass is a promotional expense, you may be able to claim the deduction.
Make sure that you document the expense entirely in order to prove that it was directly related to earned income. Record the name(s) of those with you, business address(es) of those with you, place of expense, date, time, and amount spent with the related receipts as your proof. Also, the 50% rule applies to any expense for entertainment purposes that you plan to claim a deduction for.
How to report entertainment expenses
The way you report your entertainment expenses differs slightly depending on the type of business you operate. If your business is designated a sole proprietorship or a partnership, you report your entertainment expenses on your T2125 form as part of your T1 return. Th deduction is declared in part 4 of the T2125 form. For partnerships, this deduction is declared in part 6 of the same T2125 form.
What is a meal expense?
You can claim a deduction for meals as long as the meal was eaten with a customer or a client. If your spouse is with you and your client at dinner, for instance, you can claim an expense for your meal and your client’s meal, but not for your spouse’s. You can claim a meal expense if your spouse is also an employee or a partner in the business, however.
What doesn’t count as a meal expense?
You cannot claim a meal expense for any meals eaten outside of your sales territory or meals purchased while on vacation. If you are on a business vacation or trip, you can only claim expenses for costs directly related to the trip, such as lodging and plane fare, but you cannot claim for meals.
Are taxes and tips allowed expenses?
Yes, but again, the 50% rule applies. For instance, if you treat a client to lunch and the total for food and beverages comes to $50, plus $7.00 HST and a $10.00 tip, the total you spent was $67.00. Your allowed expense deduction is $33.50.
How to record your meal expenses
There are two ways you can record your meal expenses: detailed and simplified.
Recording your meal expenses using the detailed method requires you to keep receipts and claim your expense using the actual amount spent. This method ensures you get exactly the deduction you deserve based on the amount you spent on meals, but it requires significant work to detail your expense totals. To streamline this process, consider using a shoebox or file folder to hold all your receipts, or make all meal purposes with one specific credit card. A credit card will provide you with a detailed list of all transactions to make tax time easier.
As the name suggests, the simplified method means you claim a flat amount for each meal rather than claiming a specific amount for each meal. However, it’s still a good idea to keep your receipts in the unfortunate case of an audit.
How to claim your meal expenses
The way you report your entertainment expenses differs slightly depending on the type of business you operate. If your business is designated a sole proprietorship or a partnership, you report your entertainment expenses on your T2125 form as part of your T1 return. The deduction is declared in part 4 of the T2125 form. For partnerships, this deduction is declared in part 6 of the same form.
Like entertainment expenses, the 50% rule also applies to meal expenses. There are other rules that can affect your claims for mileage, entertainment, and meal expenses, as well as rules that apply strictly to business conventions.
Canada’s small and medium-sized business owners often incur expenses that can be deducted, if you have a good online accounting service. Over 5.6 million customers use QuickBooks to track their deductible expenses. Join them today to help your business thrive for free.