If you start a business, the Canada Revenue Agency allows you to deduct your start-up costs as allowable business expenses. However, the expenses must be incurred after the day your business commences to qualify for this deduction.
Start-up costs for your business can include anything your business needs to get started. For example, if you are starting a freelance writing business, a computer and a desk may be considered part of your start-up costs. Similarly, if you were starting a shop, your first month’s rent, the cost of display stands, signs and other expenses are likely to be eligible start-up costs.
However, to claim these expenses as business expenses on your income tax return, you need to incur them during a fiscal period in which you carry on work. You must also incur them before the day your business commences.
Commencement of Business Activities
Establishing a business start date is not always easy. In most cases, your business doesn’t start the day you get your first client but rather the day when you commence a significant activity that is a regular part of your business’s attempt to make profits. For example, if you are opening an online shop, your business may start the day you order inventory regardless of when you make your first sale.
Additionally, the CRA considers a business to have commenced when the owner takes positive and continuous steps to introduce his product or service to the market. For example, if you are opening a shop, you could consider the day you first start surveying spots for your shop as the day your business commenced.
If you incurred a capital expense before your business commenced, you may be able to include this expense as a start-up cost. First, you have to make the asset available for business use.
Capital Start-Up Costs
Imagine you purchase a building for a business you are thinking about starting. At the time of purchase, you haven’t started your business yet. Rather, you are weighing several different businesses in your mind.
Unfortunately, because your business has not commenced, you cannot write off the cost of this asset as a business expense. However, once you decide on a specific business venture, you make the asset available for business use. At this point, you can consider its cost a business expense.
Capital property is considered available for business use on the date you first use it to earn income. If your asset is a building, it becomes available for use when you begin using 90 percent of it for business, or when you begin the construction or renovation process.
If the asset is only available for use for a portion of the year, you need to prorate your Capital Cost Allowance to reflect this fact.
Filing Your Income Tax Return
To file your first income tax return as a small business owner, fill out Form T2125 with your income and expenses, including start-up costs. Submit it with your federal income tax return.