The self-employed can lower their tax bill by claiming as legitimate business expenses. But, you must first know what the CRA considers as an eligible business expense.
Why know your business expenses?
Your taxable income is the result of your business income minus your business expenses. The CRA knows there's a cost to running your business and it allows you to claim many of those. Claiming your business expenses could lower your taxable income. In effect, this reduces the taxes you pay, which could put more money back in your pocket.
What are business expenses for tax purposes?
The CRA defines business expenses as "a cost you incur for the sole purpose of earning business income." Typical expenditures include money spent on buying inventory to sell or the costs associated using your personal car for business reasons.
What are some common business expenses for the self-employed?
Some typical business expenses include:
- Advertising
- Business start-up costs
- Taxes, fees, licenses and dues for business reasons
- Insurances fees
- Interest charges
- Office-related expenses
- Motor vehicle expenses
Can I deduct home expenses if I work from home?
If you use your home for work, you may be able to claim business-use-of-home expenses. Make sure one of the following applies:
- You use this home space exclusively for business, on a regular basis
- The home office is your principal place of business.
To calculate what you can claim, determine what percentage your home is used for business as opposed to personal use. Then apply that percentage to the applicable home expenses.
What records do I need for my business expenses?
The CRA doesn't just take your word for your business expenses. You need contemporaneous documentation of your expenses. Records should include:
- Sales invoices
- Receipts that include the vendor's name and date of purchase
- Voucher supporting the expenditure
- Mileage log for motor vehicle expenses
- Cancelled cheques if you receive them from the bank.
What about inventory?
The CRA says you must do an annual inventory. Often this means creating a list of goods held for sale. The stock record is used to calculate the costs of goods sold and net income.
How do you value inventory?
The CRA allows for two ways to value your inventory, whichever is lower, to determine your income:
- Fair market appraisal of your entire stock; or
- The cost of each item at the price of its fair market value.
