Whether you are fully self-employed, or have a full-time job and earn self-employed income on the side, the Income Tax Act (ITA) provides guidelines which allow you to deduct a range of business expenses. These expenses are necessary to offset your net income, lowering your income and reducing your taxes owing. These guidelines are limited to a few specific items, which means that the Canada Revenue Agency (CRA) then has the responsibility to determine if the expense was incurred for the purpose of earning income and whether they will be allowed or denied.
Here are the main deductions which you may be eligible to claim.
Business Operating Expenses
Any money spent running your business is considered a business expense, and you can claim it on your tax return as a deduction.
Business expenses include, but are not limited to:
- Advertising fees
- Start-up costs (including interest and fees on money borrowed for your business)
- Delivery or shipping costs
- Legal, accounting, and similar professional fees
- Office supplies
- Telephone, Mobile phone, and Internet (were used for business)
- Utility costs
More details here from the CRA.
Office and Home Office Expenses
If you rent an office, you can deduct the rent and any ancillary expenses for that space.
If you have a home office you can deduct its cost.
To determine your home office expenses, calculate the size of your home office as a percentage of your home’s total size. For example, if your home office is 20 square meters and your home is 200 square meters, your office is 10% of your home, which means you are able to deduct 10% of your mortgage interest or rent, utilities, home insurance, security monitoring fees, repairs and other related costs on your self-employment income tax return (T2125).
Entertainment and Travel Expenses
If you travel to a convention, meeting, or other business-related events, you can deduct all of your travel expenses, including public transportation fees, hotel costs, and conference fees. You can only deduct 50% of your meal and entertainment costs.
If you have a vehicle you use exclusively for your business, you can deduct all of the expenses related to that vehicle.
Vehicle-related business expenses you can claim on your tax return include:
- repair costs
- parking fees
If you use your vehicle for both business and personal use, you can deduct a percentage of those costs based on how often you use your car for business. For example, if you drive your vehicle 25,000 kilometers in a tax year and 5,000 of those kilometers are for business purposes, you can deduct 20% of your vehicle expenses from your self-employment income.
Along with knowing the total annual mileage of your vehicle, you must keep a logbook for your business mileage in order to accurately claim your vehicle expenses. It is also extremely helpful to have a calendar which further ties in the logbook and the travel expenses with clients, and client meetings.
Often Overlooked Tax-Deductible Expenses For the Self-Employed
Other small business expenses are often overlooked. Although each expense may be small, these tend to add up and impact your bottom line tax owing.
Examples of commonly missed business expenses:
- Bank charges on your business’s bank account, including the cost of cheques
- Yearly dues for commercial or trade organizations
- Parking fees
- Private health services plan premiums for you and/or your employees
- Interest on vehicle payments
- Cleaning supplies for a home office
- Deductions for bad debts and/or the cost of recovering balances owing to you
COVID Impact on Self-Employment
Many businesses have been impacted by the COVID pandemic. Self-employed taxpayers are facing challenges with financing, managing from distance, leasing, paying employees, etc. CRA offers COVID incentives to support your business during this difficult time whether through CERB, CEWS, or CEBA.
If your earned income in the 12 months prior to applying for Canada Emergency Response Benefit (CERB) was at least $5,000, you will be receiving a taxable benefit of $2,000 every 4 weeks as long as your income within the 4 weeks is less than $1,000. If you need further help to apply for an interest-free business loan, you should consider the Canada Emergency Business Account option (CEBA). CRA provides another benefit called the Canada Emergency Wage Subsidy (CEWS) to cover a portion of your employees’ wages to avoid layoffs.
If you are renting a space for your small business, you might want to discuss deferring rent payments with your landlord. The government had panned eviction during the pandemic to support renters in most provinces. CRA provides another help through CECRA to cover a portion of the rent for small business owners.
For more information about other Emergency Responses from CRA, please visit their link.
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