A few short words….
Every year, as we approach another tax season, I get similar questions from people with home-based or direct marketing related businesses regarding what write-offs are available to them. I thought it might be helpful to provide some short summaries on some of the expenses you may be able to claim and, more importantly, what the rules and regulations are surrounding the eligibility of some of those deductions.
Before we jump into it, I would like to mention a couple key things you should keep in mind as you go through these expenses and assess your own situation…
- Expenses should be incurred to earn income (or with the expectation of..). This is an important test, as the lines between business and personal can easily become blurred. For example, clients commonly have purchases that are split between home and business use or that are used personally but they wish to use the receipts to help lower their business income. This leads to my second point…
- Be conservative in claiming deductions. You have every right to claim all the deductions available to you. However, an overly aggressive approach of claiming each and every receipt under the sun is going to get you in trouble down the road. Many of the expenses we are going to discuss in the sections below are a common area of audit by the CRA because of the frequency with which they are improperly claimed. This could result in you being denied deductions claimed and owing additional taxes and penalties- especially bad news if you got a fat refund and spent it all! On the more extreme side, it could also end up with you being found guilty of trying to evade taxes. So, as I tell all my clients, use your gut and remember that being honest with your expenses is your best choice in the end.
- Use a professional accountant! I know I have a bias here… but that aside! CPAs that specialize in tax are well equipped to help ensure you are not missing out on important tax deductions. We are aware of ever changing rules and restrictions, and of course, we know how you can pay the least amount of tax possible!
While these blogs will provide general information, they should not be used as accounting advice related to your specific situation as they are limited by circumstances, jurisdictions, and the time in which they are written.
Now that that is out of the way, please sit back and enjoy the following articles! I hope you find them a helpful guide as you prepare for the upcoming tax season.
What Kind of Income are You Earning?
If you are working in direct sales or marketing for another company, chances are you will be receiving a tax slip of some kind at the end of the year. This will be one of the most important indicators for determining what type of income you are earning and consequently, what deductions are available to you when you prepare your personal tax return in the spring.
T4: If you receive a T4 you are considered an employee. Pay attention to what boxes are filled out on your tax slip. If all of your income is recorded in box 14, you are receiving income as a regular employee. If all, or part of your income is also recorded in box 42- you are receiving commission income. This is an important distinction as commission salespeople may have additional expenses available to them to deduct from their employment income due to the nature of their jobs.
T4A- If you receive a T4A with box 20 completed- you are receiving Self Employment Income. This means you are considered by the marketing company to be operating as a contractor (a sole proprietor). Individuals that are self-employed will have greatest number of potential expenses available to be deducted on their tax returns however, there may also be GST/HST implications as well. If you fall into this category, make sure to discuss with your accountant any additional responsibilities you may have.
T2200- Declaration of Conditions of Employment
If you are wishing to deduct any expenses as an employee, your employer MUST complete this form every year to confirm that, as part of your employment contract, you are required to pay personally for certain expenses directly related to performing your job. If your employer does not provide you with this form CRA will disallow your employment expenses. Note that this form states that you are required to pay for certain expenses but this does not automatically mean those expenses are deductible on your tax return. The deductions available to you must fall within the allowed expenses in the income tax act and often, are based on specific criteria which must be assessed on an individual basis. You can get a copy of this form directly from the Canada Revenue Agency website here
What Expenses Can You Deduct?
Unlike self-employed individuals, employees are quite restricted in the type of expenses they can deduct from their employment income. Your accountant will be able to help you determine what expenses may be available to you based on your individual situation.
Home Office Expenses
If you are Self Employed, in order to be eligible to deduct any home office expenses you must meet the following criteria:
- Must be your principle place of business (more than 50%), or
- Used exclusively for the purposes of earning income and used on a regular or continuous basis for meeting clients
If you are an employee, in order to be eligible to deduct any home office expenses you must meet the following criteria:
- The home office must be the place where you perform your employment duties, or
- The space is used exclusively or on a regular basis for meeting clients while performing those duties
*more info here*
Home-based businesses will usually meet the first criteria to deduct the home office expenses. Contractors that provide services outside of their home may find they are unable to deduct home office expenses, even if they do their bookkeeping at home, due to not meeting these criteria.
Meals & Entertainment
You may be eligible to deduct “Meal and Entertainment” expenses if they have been incurred to earn income, or with a reasonable expectation of earning income. If so, 50% of your meal costs may be an eligible business deduction. The “50% rule” is set out in Section 67.1 of the Income Tax Act and is meant to account for the fact that meals and entertainment are usually, at least in part, personal due to the implied enjoyment derived from it.
Note that there are some “entertainment” expenses, such as golf dues, that are not deductible at all! Make sure to seek advice from a tax professional if you’re unsure about the deductibility of any of these of expenses.
And don’t forget to save your transaction receipts and write the name of your client(s) on the back, in order to provide a clear paper-trail should receipts ever be requested by CRA.
*more info here*
Everyone wants to write off fuel and automobile expenses! However, this is a very common area of audit by CRA because a lot of people claim these expenses improperly. So, let’s take a closer look at what your responsibilities are for properly deducting these expenses.
You are most likely using your personal vehicle for some trips related to earning business income. Some of these might include trips to see clients, deliver products, attend meetings, purchase supplies, etc. So how can you deduct amounts spent on gas and vehicle maintenance that should be attributed to these extra trips?
Firstly, and most importantly, you will need to maintain a mileage log. This log should indicate your starting and ending kilometers for the year, and well as details of every trip for business (Date of travel, starting point, destination, reason for trip, number of kilometers driven). It’s easiest if you just keep a notepad in your glovebox or download a mileage tracking app. If you’d like to print one out from the website, you are welcome to do so here: http://davisaccounting.ca/forms.html
Secondly, you should keep all of your receipts related to fuel, insurance, maintenance and repairs, license and registration fees, lease payments, and interest. At the end of the year, your accountant will prorate the amount of your total expenses that is attributable to business travel based on the percentage of km driven for business use.
Finally, it’s important to know what is, and isn’t, considered valid business travel. For example, CRA considers travel between your home and office (or place of work) to be personal in nature and not valid as business mileage. This is a surprise to a lot of people as most of the kilometers they would like to write off are directly related to this type of travel. Why isn’t is deductible? Well, EVERYBODY has to get to work. As such, it would be unfair to give a tax advantage to certain employees or self-employed individuals over other individuals. With that in mind, CRA has determined this is not valid business travel. (This is less of an issue for a home based business since there is no travel between home and work).
For employees, in addition to having an employer provided T2200 and retaining a mileage log, additional criteria must be met:
Paragraph 8(1)(h.1) of the Income Tax Act provides for the deduction by an employee of motor vehicle expenses where the employee
– was ordinarily required to carry out the duties of employment away from the employer’s place of business or in different places,
– was required under the contract of employment to pay motor vehicle expenses incurred in the performance of the employment duties,
– was not in receipt of an allowance in respect of motor vehicle expenses which was, by reason of paragraph 6(b), not required to be included in the taxpayer’s income, and
– did not claim a deduction for the year for travelling expenses under paragraph 8(1)(f) of the Act.
As I mentioned previously, this area is quite complex. There are a considerable number of rules to determine what type of travel is deductible. If you aren’t sure feel free to ask your accountant or contact Canada Revenue Agency for further clarification.
These expenses include fees for accommodations, airline or rail tickets, taxi fares, and meals while travelling for business purposes. In order to be eligible to deduct these from employment income you must meet the following requirements:
- You must be required to pay your own travel and vehicle costs
- You must be ordinarily required to carry on duties away from the place of business and,
- You must not have received a non-taxable allowance for travel costs from your employer
To deduct the meals as part of a travel expense there is an additional stipulation that you must have been away from the metropolitan area of the employer’s business for at least 12 hours. If you meet this requirement you will be eligible to deduct 50% of the meals (the non deductible portion stems from the fact that meals are considered to be partially personal in nature- you had to eat anyways!).
*More info here *
Advertising & Promotion
These expenses may include corporate pens, hats, or shirts. Other items may include signage, posters, business cards, and advertising fees. Advertising and promotional expenses tend to be 100% deductible, with some minor exceptions. Some of these exceptions include gift cards for clients, wine/alcohol gifts, and, as we’ve mentioned previously, meals! These will be deductible at the 50% rate.
This is not an exhaustive list- just some of the more common expenses in the direct sales and marketing home based business scenarios. I will tackle some of these potential deductions in greater detail over the next couple of months, as the rules surrounding their deductibility can be quite complex.