If you are currently self-employed, the Canada Revenue Agency (CRA) lets you deduct a range of business expenses. And with tax season just around the corner, we wanted to share some of the most common overlooked tax breaks that could give you a bigger tax refund.
Running a business in Canada opens the door to an array of potential tax breaks that you can use to reduce your income tax at the end of the tax year. And if you’re lucky, you might even get a tax refund along with it.
Instead of being unsure, here are 4 income tax breaks that many small business owners often overlook:
1. Home Business & Office Expenses
A surprising amount of Canadian small business owners overlook the Home Business Tax Deduction. If your small business operates out of your home, then you might just be able to save a portion of the cost on your deductions.
Do you rent an office for your business? If so, a portion of your rent and any ancillary expenses for that space can be deducted. Similarly, if you have a home office, you can also deduct its cost. To determine your home office expenses, calculate your home office as a percentage of your home’s total size. As a simple example, if your home office is 30 square meters and your home is 300 square meters, then your home office is 10 percent of the total size of your home—therefore, you can deduct 10 percent of your mortgage interest or rent, utilities, home insurance, security monitoring fees, or repairs on your self-employment income tax return.
2. Business Operating Expenses
All dollars that you spend running the day-to-day of your small business is considered a business expense—and you can claim it on your tax return as a deduction. Business expenses can include:
- Advertising fees
- Start-up costs (including interest and fees on money borrowed for your business)
- Delivery or shipping costs
- Legal / accounting / similar professional fees
- Office supplies (more in detail in the next section)
- Telephone / utility costs
3. Entertainment & Travel Expenses
Traveling to a business convention or meeting? Any business-related event, you are allowed to deduct all your travel expenses. This includes conference fees, hotel costs, and any public transportation fees. However, you can only deduct 50 percent of your meal and entertainment costs.
Another tax break business owners often overlook is their vehicle. If your vehicle is used exclusively for your business, you can deduct all of expenses related to that vehicle, including gas, insurance, repair costs, parking fees, and other related expenses. If you use your vehicle for both business and personal use, don’t worry: you can still deduct some of that cost! The only difference is you can deduct only a percentage of those costs, based on how often you use your car for business purposes. Much like your home office deductions, let’s say you drive your vehicle 30,000 kilometers in a tax year, but only 6,000 kilometers are used for business purposes: you can deduct 20 percent of your vehicle expenses from your small business income. Of course, this means that you need to keep a consistent log book for your business mileage in order to accurately claim your vehicle expenses.
4. Private Health Services Plan Premiums
Did you know that you can receive a tax break from the Private Health Services Plan (PHSP) Premiums for you and / or your employees? In order to obtain a tax break for this overlooked category, qualifications include:
- Your net income from self-employment (excluding losses and PHSP deductions) for the current or previous year is more than 50% of your total income
- Your income from sources other than self-employment is $10,000 or less for the current or previous year
- You are actively engaged in your business on a regular and continuous basis, individually or as a partner
For more information on how you can calculate your current income to ensure you can qualify for this tax break, refer to Chapter 3 of the CRA’s Business and Professional Income Guide.
Preparing for tax season can seem like a daunting task, especially when you want to ensure that you’re getting the full spectrum of tax breaks that you’re entitled to as a self-employed small business owner. Start with addressing these deductions that you’re eligible for, stay consistent with your bookkeeping, and by next year, tax season might just be less of a daunting task!