Business Income

When Can I Claim Business Expenses?

The obvious answer to this question is “when you have a business”. But this answer is a perfect example of why obvious answers often aren’t good enough, because it just leads to another question: “When do I have a business?”

Generally, according to the Canada Revenue Agency, a business exists when you are carrying on an activity for profit and there is evidence to support that contention.

They continue this idea of the necessity of having evidence that a business exists by stating that “we consider that a business starts whenever you start some significant activity that is a regular part of the business or that is necessary to get the business going.”

So it’s an action, not a date, that determines when a small business begins – an important point because it means that you can claim business expenses that occurred before the “official” start date of your business.

For example, suppose that you decided to start a coffee roasting business and applied for and received your Master’s Business License, creating a sole proprietorship in the province of Ontario, on August 17th of this year. August 17th, then, is the official start date of your business.

But on June 30th of the same year, you paid for a coffee roaster that you were planning to use in your new business. The cost of the coffee roaster would be a business expense, even though your business did not legally exist until August.

Or suppose that you decided to start a retail business selling children’s clothing and held your grand opening on October 15th. However, on June 5th, you purchased a large quantity of children’s clothing destined for your store. Assuming this was the first “significant activity” you had taken related to creating your new business, your business would be deemed to have started June 5th rather than October 15th – making all the related expenses in between these dates claimable.

Note once again that a business’s existence is not determined by any monetary standard. You don’t have to have made any set amount of money (or even to have made any money at all) or to have actually conducted a business transaction, such as having sold something to a customer (although this would be considered a “significant activity that is a regular part of the business”).

Nor does your business have to actually open for you to be able to claim business expenses. “Expenses incurred for the purpose of earning income normally are deductible in the year when incurred even if, after all the efforts made, the business has to be wound up before its normal operation ever does begin” IT364 – Commencement of Business Operations, The Canada Revenue Agency.

Consider, though, that this same tax bulletin advises that “In order that there be a finding that a business has commenced, it is necessary that there be a fairly specific concept of the type of activity to be carried on and a sufficient organizational structure assembled to undertake at least the essential preliminaries.”

As with all tax matters, your intent to start a business will have to be clearly documented.

See a list of eligible business expenses here.

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