As a small business owner in Canada, home business taxes are something you need to address. In this chat you'll find answers to some commonly asked questions about home business taxes.
Questions arise about what tax deductions are available to you when you work from your home. You'll find the forum here to ask those questions.
I've also included responses to some commonly asked questions.
You may also want to spend some time reading the series of articles on Home Business Taxes in Canada I have written.
Notice to Site Visitors
Before I begin I would like to remind you there is a difference between information and advice. The information provided in this article on Home Business Taxes or on this site should not be construed as advice.
There is no guarantee the information is up-to-date, complete or correct. I do my best to be accurate but the answers I present are my understanding at the time posted. I am not a tax expert. Please make yourself familiar with my disclaimer.
Here are quick links to some commonly asked questions and answers on Canadian home business taxes.Automobile Expense Related Questions
Home Office Questions
Sole Proprietor Questions
Self-Employed Tax Deduction Questions
Share your home business tax knowledge or ask a question about claiming your home business tax deductions.
Here are home business tax related topics ... that have been covered in The Bookkeeping Forum. Feel free to check them out and give your opinion or share your expertise.
As more questions are asked, more links will show up here. So if you have a question ... and are willing to be patient while I use my resources to research and / or learn along with you ... ask away.
Direct Sales Expense
Hello, I started a direct sales business last year and I purchased toys to add to my demonstration kit. These toys are the same ones that customers …
Vehicle Travel Expenses for Sole Proprietor Canada
As a sole proprietor can I reimburse myself at the CRA perscribed per km rate for vehicle use instead of claiming a percentage of actual expenses for business …
Changing Fiscal Year-end Date
Is it possible to change the accounting year from June to May instead of January to December? Hi Neeque, As a general rule, sole proprietors …
Business or Hobby
I have started as an independent consultant with a direct sales company as a hobby. I have made no income. When must I start claiming as a business …
Office Repairs, Moving and Subscriptions Fees
What things can we generally record to the repair and maintance account? I am facing an unusual situation: My boss tried to repair something in his …
Business Use of Home & Ontario Property Tax Credit
If you claim a portion of your rent or property tax as a business-use-of-home expense, is it necessary to deduct that amount from the total before claiming …
Cell Phones and CRA
Are cell phones fully deductible? My client is using 2 cell phone and I am not sure if they are both fully deductible. Is there a rule on this? If …
Sole Proprietor Tax Installments
Hi there..great site... Quick question regarding Sole Proprietorship. On one of your pages you mention "when you start making enough money the CRA …
Expense Cell Phone Ticket
Can I expense my client's $167 using electronic device while driving ticket? In Part 1 of my article on Limitations and Non-Deductible Expenses …
Income Tax Added as an Expense
As an example, if I owed $10,000 in income taxes last year, can I add this to the company books as an expense (and an Accounts Payable), then use it to …
Posting CRA Penalties and Interest
We had unremitted source deductions at year end. After rolling payroll records over to the new year I posted the arrears amount owing to Accounts Payable. …
CCA Class Adjustments
What is the best way to handle a CCA classification error from a previous year? For example, a miscommunication between a sole-proprietorship and their …
Business or Professional Income
What is the difference between business and professional income on the T2125? Hi Glenda, For me, the main distinguishing factor between business …
Vehicle ITC and CCA
Using your example from How to Claim Input Tax Credits Relating to Business Use of Your Personal Vehicle : "IF your personal vehicle costs $27,000 …
Minimum Mileage Claim %
Sole Proprietor business: I input my Kms driven in the year to earn business income & the total kms driven in the year. The percentage for business useage …
Simplified Meal Rate
Simplified meal rate of $17 per meal, does that include tips? The simplified meal rate is a flat rate - $17 per meal or $51 per day. Does that include …
Phone and Internet Expenses
Split phone line and internet expenses for home office I am a sole owner who works from home and am set up with a single phone line with two numbers …
Workshop Tax Deduction
Are workshops the same as conferences? Started a new home business involving dance lessons. We are frequently attending ( 4 to 5 times a year) …
Reasonable Expectation of Profit
Uniforms and Tax Deductibility Can I deduct uniform expenses if I am self-employed? Hello there! To answer your question I would like …
CCA and Deferred Tax
How to Amortize Assets / Reconcile Statements When CCA Cannot be Claimed Due to Net Loss For many years our family-business company's assets have …
Closing My Business
Hi there. May be a silly question but I can't find the answer on the CRA site. I have decided to close my sole propieter home based business. I have …
Unclaimed Capital Cost Allowance
I've noticed that for income tax returns, not all of the CCA needs to be claimed. However, to dispose of assets during the year, CCA needs to be calculated …
Corporate Expenses vs Sole Proprietor Expenses
Do the rules regarding expenses for sole proprietorships/partnerships also apply to corporations (Canadian federal)? e.g. GIFI 8521 Advertising (http://www.cra-arc.gc. …
Business Expenses Paid Through Personal Account
How does it work when a small corporate business owner has registered for GST, but all expenses have been paid through her personal account? For all …
Are WCB premiums tax write-offs? Last I heard, WCB is required to run your business; see my short chat on WCB owner obligations and services …
Rented Storage Unit
We have a small home based landscaping company. All our work is done in a city that is 45 km away. We rent a storage unit in that city where all the …
I use a space in a home that I share for my home based business. The utility bills are not in my name. Can I still claim a percentage on my business taxes? …
Travel Meals Limitation
Hi there! I would like to begin by saying how I absolutely love this site and that it has been very helpful to my new bookkeeping business in the past …
Last Year's Receipts
I found a bunch of receipts missed being entered in last years books. What can I do with them? Can I just enter them in this year's? Hi Marie, …
Paying My Spouse or Myself?
I run a sole proprietorship. I employee my husband. Does it save me money to pay myself or my husband? Since it goes to the same bank account it doesn't …
Reimbursement of Business Mileage
I have just started running a small eBay business from home in Canada. I mail in the US. Can I claim the 52 cents per km for my trips to mail my sales …
Hi Lake Girl, I have been nudged into temporary self-employment as the result of having been laid off from a long-time job earlier this year. I found …
What bookkeeping entry would you need to record a purchase made on line? For example, two computer items were purchased on line from USA for $100.00 …
Capital Cost Allowance
Hello, I have started doing the books for a fast food vendor. It's their first year in business and they've purchased a fish & chip truck. My question …
Dec 31st CRA Deadline
Re: 10 year rolling deadline of December 31st to make an amendment / filing a return with the CRA. I recently filed my year 2000 return with the CRA …
Meals and Travel Expenses
Is there different treatment for the cost of meals in the following two scenarios? 1) Trying to make a sale, so I take the potential buyer out for a …
Is PST a Tax Deduction?
Can I write off my PST paid --- on my taxes? When you did your bookkeeping, you would have included PST in the cost of any item you purchased …
Capital Gains Inherited Property
If a person inherits land and primary residence from his mother and father, who have passed away, is there any capital gains that he must claim when the …
Filed Taxes are Incorrect
Long story short, the numbers are off, and it was the accountant that entered them. Our year end is wrong and even the description of what the business …
Bookkeeping for Partnerships
Whenever I get a new client for bookkkeeping, it generally is because they are in a mess with tax time approaching. Will bookkeeping ever be valued!! …
Self Employed and Married
Hi there. So I am self employed and have been for the past year. I am in the middle of doing my taxes, (gonna try without a accountant). Question …
CCA Class 52 - 100%
Hi Lake, How does this Computers CCA Class 52 - 100% Tax Deductible Computer exactly works in the books? Does it mean that we can expense out 100% …
Computers 100% Write-off
100% Writeoff Rule For IT Stuff I am planning to purchase a new computer for my business. I want to take advantage of the small business deduction …
Change in Use of Principle Residence
What portion of my bills for heat, hydro, insurance bills etc am I allowed to claim for a home based business? I have been told that 1/3 is acceptable. …
Capital Cost Allowance Misclassification
I am presently doing my limited company tax (T2) filing. In last year's filing, I messed up & included a UCC amount for computer/software (class 50/52) …
Q. As an incorporated
business we have chosen to use our personal vehicle for business and
charge $.52/km for mileage. Most of our contracts cover travel expense
and we bill this mileage to clients.
Does the $.52/km include GST/HST? Can we claim GST/HST tax credits on this expense when paid to us personally?
A. This site visitor and I had a few emails back and forth on this. On my recommendation, a GST ruling was requested. This response is information obtained by GST Rulings Vancouver that was kindly shared with me.
So one of the things that is important to point out here is, if you are unsure how to treat a certain transaction with regards GST/HST when dealing with your home business taxes, one option available to you is to call or write and ask for a GST Ruling on your specific circumstances.
Q. Are business owners subject to CPP?
A. The answer to this home business tax question is yes. Here are some links for more information for sole proprietors:
If you are incorporated, you are an employee. Find out more here keeping in mind you will be reporting your tax information on a T2 not a T1:
Q. Are bookkeeping service fees tax deductible in Canada?
A. Yes. You can deduct them on line 8860 Professional Fees on Form T2125 Statement of Business or Professional Activities.
Q. Do I charge GST/HST on the sale of a business asset such as office equipment?
A. The answer to this home business tax question depends on your GST registration status. The general rule is ...
... if you are a GST/HST registrant, you must charge GST/HST on taxable goods if the goods are sold in the course of your business activities.
... if you are not a GST/HST registrant, you do not charge the GST/HST on the goods sold.
... if you are the owner of a business and the goods you are selling are NOT related to your business activities, you do not charge HST/GST on the sale of goods.
Q. Don't I pay more income tax if I voluntarily register for GST/HST?
A. Here's my understanding of how GST/HST works to lower your total home business taxes.
I. Sales under $30,000 and you are not registered
You have sales of $1000 on which you cannot charge GST and expenses of $675 on which you paid GST of $33.75.
Net Profit to you is $291.25. You pay income taxes on this amount (which you can reduce by considering other deductions that are available such as CCA, home office expenses and business use of your personal vehicle).
Federal income taxes would be $43.69 ($291.25 x 15%) as I assume your total taxable income is under $43,954 (2013 maximum for 15% tax rate). I won't bother with provincial tax for this example.
II. Sales under $30,000 and you are registered
You have sales of $1000 on which you charge $50 GST and expenses of $675 on which you paid GST of $33.75. Net Profit to you is $325.00. You pay income taxes on this amount (which you can reduce by considering other deductions that are available such as CCA, home office expenses and business use of your personal vehicle).
Federal income taxes would be $48.75 ($325 x 15%). Again, I won't bother with provincial tax. So you are right in thinking you are paying higher income taxes.
However, you also submit your GST report as follows:
GST collected $50.00 and GST paid $33.75. Amount owing to CRA is $16.25 as you claim the input tax credits. During some periods when your sales are slow, your expenses may exceed your sales. Then you would receive a refund.
So now total taxes paid are:
Federal income taxes would be $48.75 ($325 x 15%).
Subtract ITC refund $33.75 received after filing report = $15.00 in total taxes paid.
A total home business tax savings of $28.69 ($43.69 - $15).
After taking into affect the GST ITC refunded, you now have paid less tax because GST is a neutral tax to GST/HST registered businesses. That's how I look at it.
If you had registered for GST/HST during the startup of your business, you could have claimed all of your ITCs from startup and received a refund.Check out how you can recover some of your ITCs if you weren't registered at startup ...
Q. Where do you input / report owner's draws on your tax return?
A. As a sole proprietor, your drawings are reported at the bottom of page 3 of Form T2125.
Home Business Taxes, A Tax Planning Opportunity explains how you are taxed.
How to Create an Audit Trail explains how to record any draws you take.
Q. Are life insurance payments a tax deduction in Canada?
A. Life insurance premiums are not a tax deduction because the funds paid out are tax free.
Check out 12 other items that are not tax deductible.
Q. Are WCB penalties tax deductible in BC?
Are tax penalties a deductible business expense in Canada?
A. Sorry, no they're not.
Read more about more items that are either not deductible business expense or have limitations in Part 1 of this series.
Q. Is my receipt log book considered as legitimate receipts for my Canadian tax return?
A. It is my understanding that a receipt log book is valid for services where a receipt is not normally issued ... otherwise you need to keep to your receipts as supporting documentation.
If your receipt log book is your only transactional recording system for your business, consider it to be like a bookkeeping ledger which an important part of bookkeeping records. CRA will want to look at it just as they would any bookkeeping ledger.
You may be interested in reading Creating An Audit Trail for more information on what constitutes a legitimate receipt and the use of log books.
You may also want to read about what records you must keep for the Canada Revenue Agency as you prepare your home business taxes.
Q. Are country club dues deductible or not?
Q. I have a home based business but my home has only one phone line. What are the rules for business use of your home phone in Canada? Can I deduct it?
A. You can deduct some expenses of your home phone line, if you use it for business, when you don't have a separate business line. Find out more about the restrictions on deducting business use of your home phone line here.
More information on where to claim the deduction for business use of your home phone on your tax return can be found in Part 2 of this article on Home Business Taxes.
Q. As a Canadian farmer, what percentage of my telephone and power can I deduct on my tax return?
A. The CRA Interpretation Bulletin IT-514 Work Space in Home uses farmers (and contractors) as their example. How to calculate your allowable office expense claimable for operating your farming business with your home as your principal place of business is explained. Here is an excerpt:
"The work space in a farmer's home utilized to operate the farming business would normally be the farmer's principal place of business. The room used by the contractor and the farmer's work space could also be used for personal purposes since they need not be used exclusively for the business in order to meet the 1(a) requirement."
You will find how to prorate home office expenses here. Use business use - criteria one for your calculation.
Make sure you read the restrictions on deducting your home phone line before doing your home business taxes.
Q. What organizations are GST exempt?
A. As of July 1, 2010, the federal government, participating provinces, PEI and Nunavut governments and municipalities pay GST/HST on taxable goods and services. The remaining provinces and territories, including their Crown corporations, boards, commission, agencies and departments or ministries, do not pay GST/HST if they provide certification.
Federal and provincial governments ... and public service bodies - PSB (charities, municipal, universities, public colleges, school and hospital authorities, not for profit organizations) have to charge GST/HST on their taxable goods and services. PSBs may qualify for small supplier rules and rebates.
Go to CRA's website for more
information and exceptions at A to Z index> GST/HST> G>
Governments - Federal, provincial, territorial and municipal
Prior to this date ... this is not my area of expertise as I deal mainly with small business ... so don't take my word on this ... but here is my understanding.
Public service organizations were generally GST exempt which meant you were not be required to charge or be charged GST. This includes government organizations at all levels:
Organizations like CMHC are also GST exempt.
Charities (if not a GST registrant) are not required to collect GST and may claim a 50% GST rebate on eligible purchases by filing form GST66 - Application for GST/HST Public Service Bodies' Rebate and GST Self-Government Refund.
Non-profit organizations must collect GST/HST and are eligible to claim ITCs.
Q. Can I claim auto expenses if I do not have business coverage?
A. As far as I know, if you use your vehicle for business purposes, you can claim your auto expenses related to your business portion usage only, even if you don't have business insurance.
You may want to consider the risks you are taking by not carrying business insurance for your vehicle if you are using it for business purposes.
Go to "The Tax" section to read more about Home Business Taxes and your vehicle.
Check back as more questions and answers on home business taxes are asked and answered in the forum.