You open your inbox and see an estimated tax balance from your accountant — $16,000. Yikes. Do you consider all the eligible small business tax deductions in Canada? If not, you could end up paying a hefty tax bill each year. Not to mention all your personal taxes too. Most corporations face an income tax rate of roughly 15% in Canada. But you can minimize that taxable income if you know about the right deductions.
Table of contents
- What is tax deductible in small business Canada?
- How much can a small business make before paying taxes in Canada?
- What is the Small Business Tax Deduction in Canada?
- Do small businesses pay taxes their first year?
- Can I claim groceries as a business expense?
- What deduction can I claim without receipts?
- Maximize small business expenses in Canada with a wealth manager
Here at Wealth Management Canada, we connect business owners to wealth managers that support them in various wealth goals, including minimizing taxes. But what small business tax deductions in Canada should you know about for this year’s filing? Keep reading as we walk you through all the deduction categories available to minimize your tax bill!
What is tax deductible in small business Canada?
The good news is that you have a wealth of eligible expenses to deduct from your small business income — many more than your average personal deductions. The CRA describes eligible business deductions as any reasonable, current expenses you incur to earn income.
Here are some eligible expense deductions for your business:
Transportation, fuel, and delivery
Delivery and fuel costs: Any delivery fees for items you need for your business are deductible. This also counts gasoline costs for your own vehicle if you use it for work purposes.
Motor vehicles: Renting a car for your business? You can deduct a wealth of expenses from the vehicle, like license and registration fees, insurance, fuel, interest incurred to buy, leasing costs, and more.
Communication, marketing, and other professional expenses
Legal, accounting, and other professional fees: You might not like that accountant bill this year, but the good news is that you can deduct it in full from your taxable income. The same goes for any fees incurred for business legal tasks, along with professional fees for associations, and so on.
Telephone and utilities: Don’t toss that hydro bill! If it’s for your place of business, you can deduct that. Same goes for your cellphone bill and other utilities like gas and oil.
Advertising: Marketing your business on a newspaper ad or through a Google Ads agency? You might even pay for SEO services to bring your business more web presence. These costs are deductible since they bring in more business.
Salaries and wages: If you pay staff, you can deduct their wage/salary, benefit costs, and employer contributions to CPP and EI. Just don’t go trigger-happy on salaries for family members. If you pay your wife $100,000 a year to be your administrative assistant, you could face repercussions and penalties from the CRA.
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Bank and lender charges, insurance, and interest
Interest: Interest charges on loans and commercial mortgages are 100% tax-deductible.
Insurance: You can deduct 100% of your insurance premiums for machinery and equipment, and commercial property. Additionally, you can deduct car and home insurance in some cases, though you’d need to file them under their respective categories. Unfortunately, you can’t deduct life insurance from business income.
Bank charges: Do you pay an annual fee for your bank account? You can deduct that, along with payment processing fees and currency conversion costs.
Loan fees: Business loans sometimes come with penalties if you pay too early. The CRA considers this prepaid interest, and you can deduct it.
Travel and events
Travel: Travelling to a business meeting or conference? You can deduct travel expenses like meals, hotel costs, and public transportation fees. For meals and entertainment, however, you can only deduct 50%.
Meals and entertainment: You can claim 50% of any expenses you incur for meals and entertainment related to business activities. So if you take a prospective client to lunch or to an arts show, you can claim 50% of the bill if you paid for everything. Entertainment also includes room rentals on Airbnb and hotels.
Home office and other places of work
Capital cost allowance: Anything depreciable is considered to give you a capital loss, whether it’s property or aging equipment. You can deduct the loss over several years.
Maintenance and repairs: Need to call the plumber for your office property? That’s considered a deductible expense, along with any other maintenance or repair costs incurred on a property you use to generate income.
Office expenses: Office rent payments and supplies are eligible for deductions. These might include printers, computers, pens, pencils, paper, and other office items.
Property tax and rent: Renting land or commercial space? That’s deductible! So is property tax on building or offices apart from your home office.
Business use-of-home: This is a special case for business owners who have a home office that they regularly use to meet clients and generate income. As long as you make money in that space, it doesn’t have to be your primary office. You can deduct a portion of cleaning supplies, heating, insurance, and other maintenance costs that are consistent with the proportion of space the office takes up.
Keep in mind that if you fall under this category, other expenses mentioned, like property tax and home insurance, must be filed and deducted under the business use-of-home category.
General business expenses
Business tax, fees, licenses, and dues: Your annual business license is a tax-deductible expense, along with any subscriptions and membership fees to industry associations. Just don’t include your golf club membership though – those clubs are considered sporting, dining, and recreation, for which membership expenses aren’t eligible for deductions.
Bad debts: Did a client forget to pay their balance? You can write off 100% of any bad debts as long as you initially declared them as income.
A few more CRA-approved business expenses include:
- Disability-related office modifications
- Convention costs
- Private health services plan (PHSP) premiums
- Non-deducted premiums
- Allowable reserves
Learn more about other business expenses from the CRA.
How much can a small business make before paying taxes in Canada?
It depends more on the net income, not the gross income. Any positive net income will be subject to taxes, even if it’s $1. If you have a loss, you won’t have to pay tax. In other words, there is no minimum threshold where you don’t have to pay tax as a small business.
Related Reading: Selling a Business in Canada: Tax Implications
What is the Small Business Tax Deduction in Canada?
The small business deduction (SBD) offers a 9% tax rate reduction on the first $500,000 of income in Canada. The government offers this tax deduction with the hopes that small business will reinvest the extra tax dollars and create more jobs in Canada. To be eligible for the small business deduction, you must be a Canadian controlled private corporation (CCPC) and be earning active business income, not passive income. In addition, if there are related companies, the small business deduction must be shared among all the companies.
What is the CRA small business tax rate?
Here’s a quick look at corporate income tax rates for small businesses:
|Before/Without the SBD||With the SBD|
|Federal Tax Rate||15%||9%|
|Provincial Tax Rate|
|Newfoundland and Labrador||15%||3%|
|Prince Edward Island||16%||1%|
Quebec has an approximate 19% tax rate, including both federal and provincial taxes. Alberta’s corporate income tax is 8.5%, the lowest in Canada.
Do small businesses pay taxes their first year?
Yes, small businesses must pay taxes on their income even in the first year of business. It’s not like personal income, in which you can earn tax-free up to about $15,000 (the basic personal amount).
However, some people confuse corporate tax with GST/HST. While small businesses must always pay corporate tax, they don’t have to charge or pay for GST/HST until they generate $30,000 in income for four consecutive quarters.
Related Reading: The Three Phases of Managing Cash Flows
Can I claim groceries as a business expense?
You can make a case for claiming groceries, especially if you’re self-employed as a business owner. Keep in mind that you can only claim 50% of the costs incurred — these would be filed under meals and entertainment.
What deduction can I claim without receipts?
Ideally, small business owners should have receipts for all their business expenses. However, one lawyer muses that the Income Tax Act allows for “reasonable documentation” obtained through “indirect audit techniques,” which might not necessarily mean receipts.
You can claim as many small business tax deductions in Canada as you want without receipts, but the CRA might audit you and deem them inefficiently documented. Fortunately, bank statements showing the transactions can often be used in the absence of receipts.
Maximize small business expenses in Canada with a wealth manager
If you’re a small business, you know more than anyone how quickly taxes can add up and hamper your budget, especially with inflation. But Canada has a wealth of small business deductions waiting for you to reap to lower your taxable income.
Sometimes, it’s tricky to distinguish business expenses from personal ones. Similarly, you might not realize which of your transactions are when examining things on your own. Of course, you should enlist support from your accountant — but a wealth manager is well-versed in tax tactics to help you maintain your wealth. Ready to maximize small business deductions in Canada? Find a wealth manager today!
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