Small Business Tax Deductions Overlooked in Canada

In Canada, the average small business owner pays more than 42% of their income taxes. First of all, that is a lot of money. Secondly, nobody ever wants to give more of their income to the Canada Revenue Agency (CRA) than they legally have to.

Surprisingly, small business owners, those who are entrepreneurs, self-employed, and independent contractors are failing to make a large amount of tax deductions every year.

It isn’t clear to business owners what is permissible which is why these tax deductions are being overlooked. Also, certain tax deductions can only be applied depending on what type of business you are operating.

Even with these specific businesses there are different tax deductions that can be applied. For example, short haul truck drivers can’t take advantage of certain tax deductions that long-haul truck drivers are allowed to take advantage of.

Many small business owners that they are allowed to deduct office repairs and maintenance, home office expenses, and utilities, but they’re not aware of a lot of the other tax deductions that they could be making for their business.

So, are you benefitting from all of the tax deductions that your small business could be writing off?

Here are the most common tax deductions that most small business owners in Canada are overlooking but be sure review the detailed breakdown that QuickBooks has along with their  free-to-use budget template.

1. Home Based Business Expenses

You may be able to deduct a portion of your utilities, rent, and other expenses if you run your business out of your home. Your home office must be the principle location where you conduct your business or the office in your home must be used only for business, for example not your dining room unless you have cornered it off as an office. The space in your home must also be a place for meeting customers or clients, as of now, CRA’s position is that this doesn’t include video meetings.

Always speak to your business’s accountant to be sure that you are not missing out on everyday expenses that you can be claiming to lower your tax bill.

2. Research And Development

This can be a very big undertaking, however there are some serious tax credits that you can take advantage of, if you qualify. Many small businesses don’t even realize that you do not have to be a big business, you don’t even need to be an incorporated business to claim any tax credits for scientific research and experimental development (SR&ED).

The great thig about this tax credit program is that it is a refundable tax credit, so if your small business doesn’t make any profits, you can receive a cash refund.

3. Vehicle Expenses

It can be a bit track to keep track, but you can deduct vehicle expenses that occur for business purposes. There are a few ways to go about deducting vehicle expenses for your small business. It is recommended that you keep any vehicle that you are using for both personal and business use in your personal name. You can avoid some potential personal tax liability by doing so.

1. The first way, and the simplest, is to pay yourself a per-kilometre rate based on the CRA’s current allowance rate. This will ensure that your payment is deductible by your business, but not taxed as income in your hands. You must still personally pay all the car expenses, such as maintenance, gas, and insurance. The limitation in this scenario is that this is only an option when your are an employee of your corporation.
2. Tallying all of your vehicle expenses for the year and multiply by the percentage you used for business is the second way to calculate your business vehicle deduction. For example, if you drove 10,000km during the year and 3,000km of that was for business purposes, you can deduct 30% of the expenses for your vehicle for the year.

You will be required to keep a log of business use of your vehicle when using either of these methods, it will also need to be maintained meticulously or the expenses can be disallowed. If you are looking for a more simple way to keep track, check out Mile IQ.

4. Hiring Your Child Or Spouse

The cost of an employee’s wages is classified as a business expense whenever you are hiring someone on to your team. This is also true even when you are hiring your child or spouse. The only difference is that when you hire your own child or spouse this also gives you the chance to do some income splitting. By employing you child or spouse in your small business, you might be able to decrease your net income into a lower tax bracket, which can net you a nice income tax deduction.

5. Advertising And Promotional Material

Whether you want to advertise in print or online, regardless of the medium, you can make deductions for advertising your business in Canada.

Small businesses can’t just sit and wait for word-of-mouth to catch on, even though it is a great form of marketing. These business owners need to be proactive. Whether its through personalized merchandise at a convention or a seminar, such as pens, t-shirts, mugs, USB sticks, or stickers, or placing an ad on a local radio station, you can have them written off as an expense for your small business.

Keep in mind that business promotional material can also include decals that you purchased to promote your business on the side of a van or truck.

6. Apprenticeship Job Creation

Your small business can receive an Investment Tax Credit for up to $2,000 for hiring an apprentice, if you are hiring tradespeople, who is working in the first two years of their apprenticeship program.

If you are a sole proprietor you can also take on an apprentice as well. Using The Apprenticeship Job Creation Tax Credit is an excellent way to get some skilled help to work for you at a reduced rate.

You May Be Thinking Too Small

It can be a big worry that you may be missing out on some tax deductions for your small business, but did you know that the government of Canada also offers some massive incentives to help you build a successful business. This is called the Lifetime Capital Gains Exemption, as of 2020 it is worth $848,252 in tax-free money. There are some hoops to jump through, as you may have expected, but if you can build a business and sell your shares to another party, your gains may be eligible for this exemption.

You may be tempted to focus on saving a few bucks here or there, but you are better of spending your time focusing on scaling your small business. If you are looking for more advice on business tax credits, sign up for a membership, speak with our