If you own an unincorporated small business then the you must prepare an income statement each year showing all the income and expenses of the business and the resulting net profit or loss is then transferred to your tax return and taxed along with your income from all other sources.
As a small business owner, you are entitled to deduct the ongoing costs of doing business, as long as the expenses are reasonable and your motive for being in business is to make a profit. You must have a good record keeping system such as Quickbooks Essentials otherwise there is a good chance that you will forget about expenses that you have incurred and lose some receipts for expenses that you could claim. Some of the most common deductible expenses include advertising, promotions, rent, salaries, legal and accounting fees and auto expenses.
Deductions Available to your Small Business
- Advertising including flyers, brochures and other promotional activities. You can deduct 50% of the cost of entertainment and business lunches as long as they are used to promote your business to current or prospective clients.
- Office Rent is deductible, however if you own your business premises or work out of your home you cannot deduct the rental value of these premises. However you can deduct any related expenses such as mortgage interest, property taxes and insurance. If part of the premises is used for personal purposes then these expenses must be pro-rated.
- Salaries and Wages are deductible in full as are the employer paid premiums for the Canada Pension Plan, Employment Insurance, Worker's Compensation as well as sickness, accident, disability or income insurance plans. If your spouse or child works for you their wages are also fully deductible as long as the payments are reasonable and the same as you would pay someone else to do the same work. As the owner, your wages are not deductible and should not be included on your income statement.
- Fees for Outside Professional Services such as bookkeeping, accounting, consulting and tax preparation are deductible. Legal fees are also deductible as long as they are not incurred to buy capital property, instead they have to be added to the capital cost of the property.
- Business Taxes annual business licenses are deductible. Fines and penalties for infractions of public laws are generally not deductible.
- Automobile Expenses related to earning business income are tax deductible. If you use your vehicle only partly for business then the expenses must be pro-rated between business and personal use based on the amount of kilometres driven for each. Expenses include gas, oil, repairs, insurance and maintenance. For more information log into the CRA website.
- Capital Expenditures which are expenses relating to the acquisition or improvement of a property used by the business may not be deducted in the year acquired. Tax law requires that their entire costs be claimed slowly over a period of years through a mechanism called capital cost allowances which allows a certain percentage of the costs to be claimed each year. The rules of capital cost allowances are quite complicated so it is a good idea to hire a professional accountant or bookkeeper to make sure that you are claiming correctly. For more information see the CRA website Capital Cost Allowances.
When your business enjoys a profit you must share part of that with the CRA in the form of income tax. However when your business shows a loss then the CRA shares in that loss as you are usually allowed to deduct the loss against other income thereby lowering the taxes you would normally pay. However, you must meet the CRA "reasonable expectation of profit test" as the CRA will only share your loss if there is a reasonable expectation of profit in future years, otherwise your losses will be disallowed as simple personal losses.