Starting your own business can be an exciting, scary, and costly venture.
If the costs of starting a business are holding you back, don’t worry. You don’t necessarily have to empty your savings account to fund your new business.
The Canada Revenue Agency (CRA) has a number of tax incentives in place to encourage Canadians like you to launch their business ideas. These incentives allow you to deduct a number of start-up costs as business expenses when you start a business in Canada.
What is a Start-Up Cost?
A start-up cost is any money you need to spend to get your business off the ground. This can include any inventory, machinery, or equipment you need for your business to begin normal operations. If you were starting a graphic design company for example, your computer, desk, and graphic design programs could all be considered as part of your start-up costs.
In order for a start-up cost to be eligible for a tax deduction, it must arise during the tax year (or fiscal period) your business started. Any eligible start-up cost must arise after your business’ official start date.
Determining Your Business Start Date
Determining your official start date can be a little tricky because the start date of your business isn’t necessarily the day you make your first sale or the day you officially start working, but rather the day you commence a significant activity that is a regular part of your business’ attempts to make profit.
So, if you had previously purchased a computer, and now you’re going into business, your computer would not be a business write-off because you already had the computer before your official start date.
Sometimes, purchases can indicate a start date in themselves. For example, if you start to purchase inventory for an online store, this may signal your start date because you have made a significant action toward beginning your business through this investment.
As you can see, the start date isn’t necessarily your first official day in business, but rather the day that shows the business owner’s intent to start a business. Some other examples that show intent to start a business include:
- When construction of a place of business began
- When arrangements were first made for acquisition or transportation of materials and/or supplies
- When inventory was first purchased
- When the business was first advertised
- When employee training began
- When initial contracts were negotiated
As already mentioned above, any expenses you incurred before the official start date of your company cannot be considered a business expense and are not deductible. Any costs you incur for the purpose of earning income after the start date of your business can be deducted for that fiscal period.
Claimable Start-Up Costs
Your business start up costs can include any reasonable expenses for anything your business needs to get started. Personal expenses are not deductible. You are only able to deduct legitimate business expenses.
Legitimate expenses can include:
- Business tax, fees, licenses, and dues
- Business-use-of-home expenses
- Motor vehicle expenses
- Legal, accounting, and professional fees
- Office expenses
- Telephone and utility bills
According to the CRA, to claim an expense as a start-up cost on your income tax, you need “to have carried on a business in the fiscal period in which the expense was incurred.” For a complete list of allowable Business Start Up Expenses, please click the link and it will take you to the CRA website. For a detailed list of all business expenses, you can click the link and visit the CRA’s Business Expenses page.
Transferring Assets to Your Business
While expenses for your business must occur on or after your start date, you can also transfer assets to your business in your first year. If you already own assets (like a computer or vehicle) that you want to use for your new business, you can transfer ownership to your business and claim them on your taxes.
When you are transferring assets, you will need to transfer them at their Fair Market Value and update this amount as their value depreciates.
Fair Market Value
If you are operating a sole proprietorship, transferring assets to your business is a reasonably simple process. The Income Tax Act requires that you transfer these assets to the business at their Fair Market Value (FMV). This means that we consider you to have sold the assets at a price equal to their FMV at that time. If this amount is greater than your original purchase price, you must report the difference as a capital gain on your income tax and benefit return.
Your business will show a purchase of these assets, with a cost equal to the FMV at the time of the transfer. This is the value that you will add to the capital cost allowance (CCA) schedule for income tax purposes.
For income tax purposes, when you transfer the property to a Canadian partnership or a Canadian corporation, you can transfer the property for an elected amount. This amount may be different from the FMV, as long as you meet certain conditions. The elected amount then becomes your proceeds for the property transferred, as well as the cost of the property to the corporation or partnership.
For GST/HST purposes, you may be able to claim an Input Tax Credit (ITC) for the GST/HST paid or payable on property such as capital property and inventory, that you have on hand on the day you register.
Good luck in your new business venture, and if you are looking for a smart, easy way to keep track of your business expenses, income and everything else, check out QuickBooks Self-Employed.