Tax deductions, also known as tax write-offs, is the act of claiming back some of the expenses incurred while running a business. These write-offs allow individuals to lower their total taxable income on their federal returns.
The Canada Revenue Agency (CRA) dictates what expenses can be claimed back and how much they can be written-off for within your self-employment tax forms.
What Can You Write-Off As Self-Employed in Canada?
One of the most successful ways self-employed individuals can save money each year is by claiming back business-related expenses on their income tax returns. Therefore, it’s essential to take advantage of these tax write-offs for self-employed persons to save significant amounts for their business each year.
Here is a list of common and not so common, self-employed deductions in Canada that you can take advantage of on your tax return for the next tax season. Each of these write-offs can be found and filled in on the T2125 form, Statement of Business or Professional Activities.
1. Operating expenses
The operating expenses incurred in running your own business are eligible for deductions as sanctioned by the CRA. Such operating expenses refer to all costs associated with the primary operations of your self-employment. These costs include business rental space, office supplies, repairs and maintenance, inventory, payroll, utilities, and professional fees. Expenses covering investments in the business, such as real estate or equipment, are considered capital expenses and do not fall under this deductible.
You can use a self-employed expenses calculator to help determine how much you will spend over a period of time in operating costs and the savings associated with their write-offs.
2. Home office
Many self-employed persons work out of their own homes when operating their business activities. Just as you can deduct office rent from your income returns, so too can you deduct home office rent. If you run your business from your home, and use the space for the majority of your activities, then you can deduct a fraction of the cost of your home rent for the tax period. This would fall under the business-use-of-home expenses.
To determine how much this deduction will be, you must take the total square footage of your apartment or home and divide it by the square footage of your home office space. Other home office expenses, such as supplies, including cleaning supplies, and utilities, can also be deducted from your returns in this category.
3. Entertainment and meal
Meals and entertainment costs associated with your self-employed business are eligible for self-employed write-offs as sanctioned by the CRA. However, these costs must be incurred in the company’s name, such as client dinners or employee lunches.
On top of this stipulation, the CRA dictates that only 50% of the total cost of the meals and entertainment can be written-off. To successfully claim back this money, you will need to show sufficient evidence that the food or entertainment costs were reasonably and appropriately used for your business.
When travelling for work-related purposes, save those receipts, as you can deduct the costs of such expenditures! The CRA allows tax write-offs for self-employed persons who travel outside their usual area of business for other work-related reasons. Such costs associated with travelling to meet a client, pick up inventory, or even speak at a professional conference- these are all reasonable and valid instances that allow for deductions.
When travelling for work, you are eligible to deduct associated food, beverage, lodging, and transportation costs. These include plane and train tickets, meals, hotels and accommodations, and parking fees or tickets. However, for the CRA to approve these claims, you must provide evidence that all costs were incurred for work purposes, and reasonably so.
If you commute to work for any reason, then these costs do not count as travel costs. Commuting costs are not eligible for deductions.
5. Vehicle expenses
If you own a vehicle that you use for personal and business use, then certain costs can be deducted from your income returns. Personal vehicle use is not eligible for any type of write-offs, but a fraction of such costs can be written-off if you drive your car for work-related reasons.
For example, when driving your vehicle for business use, it is best to track your mileage. Recording this mileage throughout the year will help you come tax time, as a percentage of these costs can be claimed back. You will need to keep detailed records of when the car was in use for business and personal purposes to deduct expenses associated with the business portion of use.
However, if the vehicle in question is only used for business purposes, then almost all costs associated with its running are eligible for deductions. This includes gas, mileage, repairs and maintenance, insurance, insurance premiums, and oil changes.
Like travel write-offs, the costs associated with commuting driving are not eligible for self-employed tax deductions as dictated by the CRA. Learn more about the intricacies of writing-off vehicle expenses on your returns.
6. Advertising and marketing
Self-employed tax deductions can cover a part of your advertising and marketing costs too. However, to claim back such expenses, you will need to meet specific criteria covering Canadian content and Canadian ownership requirements. Any advertising paid for on foreign websites, or other mediums cannot be claimed as deductions.
7. Websites and software
In this day and age, a business website has become a prerequisite to running a business and reaching your target audiences. As a result, the CRA dictates that certain costs associated with your business website are tax-deductible. Whether you pay for monthly hosting services or a professional designer to create a website for you, you could be eligible for deductions on these expenses.
This also includes costs associated with the purchase of software that will help you run your business, such as accounting and inventory software. Suppose you use QuickBooks Self-Employed software to help you run and manage your business activities. Then you can claim back these expenses on your returns.
8. Bad debt
Bad debt refers to money owed to you by others that cannot be paid back. It is uncollectible revenue and it is still considered a business expense. If you invoice a customer for $100, and they cannot pay it back due to bankruptcy or other issues, then the $100 becomes bad debt.
In order for bad debt to be expensed and written-off, the CRA dictates that you must have done one of two things:
- Establish that an account receivable is a bad debt expense within the specific tax year.
- The bad debt has already been included in your receivable income.
If you have done this, then you are able to claim bad debt under business expenses in the T2125 form.
9. Private health service plan premiums
If you pay for a private health plan each year, then the premiums you pay on that plan are tax-deductible. Typically employed persons will have their place of employment pay for such health care plan premiums. However, when you’re self-employed, this cost falls on you. As a result, the CRA allows for self-employed write-offs associated with these premiums, as well as other insurance premiums.
10. Yearly industry or professional fees
The expenses associated with professional certification required to work in your industry are eligible for write-offs. As these fees and costs are directly tied to your ability to work, the CRA allows filers to deduct the cost of such licenses, certifications, and other dues or requirements.
11. Professional development and educational expenses
On top of the professional fees and certification, further learning and professional development can also be deducted from your personal returns. The CRA determined that the expenses associated with ongoing professional learning and other educational costs that further your industry knowledge can be approved for write-offs. This type of educational business expense also includes the interest you pay on your student loans here in Canada.
12. Interest and bank charges
Interest and bank charges attached to your business accounts can be written-off. If you have borrowed money for your business, then the interest paid on this amount is deductible. However, you should be aware there are strict limits on the interest you can deduct depending on what the loan was for. Your deductions will differ if you used your loan for vehicle purchases, vacant land, real estate mortgages, and other fees related to the loan.
Providing Source Documentation
To successfully deduct the cost of self-employment business expenses, you will need to provide evidence, such as receipts and invoices, or other documentation, for the corresponding business expense in each instance within your tax return file. The CRA must see these source documents to ensure that all tax deductions are accurate and accounted for when reviewing your returns.
Accounting Software That’s Helps With Deductions
If you require help with your self-employment deductions in Canada, consider using accounting software. QuickBooks Self-Employed helps individuals track and sort their expenses automatically and in real-time. This accounting software can help you take advantage of all available self-employment tax deductions from the government of Canada.
Try it free today, and you’ll feel like you just hired your own personal accounting team to work for you this tax season!