What Is a Tax Write-Off?
A tax write-off is simply another way of saying “tax deduction.” With a tax write-off, you can deduct a large number of expenses approved by the Canada Revenue Agency, all of which help to significantly reduce your taxable income.
For example, if you make $100,000 a year and have $15,000 in write-offs, you are only going to be taxed on $85,000 in income. In some cases, tax-write offs can lower your federal tax bracket, reducing the amount of income tax you need to pay.
If you had an annual income of $100,000 last year—the 2017 federal tax rate was 26% ($91,831 to $142,353). Writing-off $15,000 lowers your income to $85,000. With an $85,000 taxable income, your tax rate would be 20.5% ($45,916 to $91,831).
Depending on which province you live in, your small business may be eligible for other tax write-offs.
There are a lot of different write-offs that small business owners can take advantage of to reduce their taxable income; some are common, and some are uncommon.
Below is a list of write-offs tips small business owners in Canada can use to reduce their tax burden and, in some cases, put them in a lower tax bracket.
5 Tax Write-Offs for Small Business in Canada
Home office expenses are the most common tax-write offs for small businesses in Canada.
If you work from home, whether it’s in a big office or on the kitchen counter, you can claim a large number of different expenses.
How much you can write-off is determined by the percentage of your home office space compared to the total size of your home.
If you work from home, you can write-off:
- Mortgage interest on your residence
- Property taxes
- Repairs and maintenance
- Home insurance
- Furniture, computers, office equipment, mobile devices, etc.
When it comes to home office write-offs, the key is understanding the difference between office expenses (pens, stamps) and depreciable assets (printers, filing cabinets, computers). Depreciable assets wear out over time, so you can only claim a portion of the original cost as a tax deduction each year.
Most Canadian small business owners use their personal vehicles for business purposes. This can be advantageous come tax time because you can write-off the business portion of your vehicle use expenses.
Vehicle expenses include:
- Fuel and oil
- Parking fees
- Repairs and maintenance
- Toll charges
- Vehicle registration fees
- Capital cost allowance (if you own)
- Lease payments (if you lease)
Vehicle expenses tend to be one of the most abused ways of claiming deductions. And, as a result, one of the most scrutinized by the Canada Revenue Agency.
You are required by the Canada Revenue Agency to keep an accurate logbook to verify when the car is being used for business and pleasure.
You can deduct all regular commercial insurance premiums you incur on any buildings, machinery, and equipment that you use for your business. This includes your home-based business.
But there’s a catch. Your home-based business needs to have commercial insurance. Home-based business insurance is pretty much commercial in nature, but it’s separate from home insurance.
Why should you spend the extra money to get commercial insurance for your home-based business? If you don’t have home-based insurance and something happens, you may not be covered. In some cases, your home insurance can be nullified if the insurer doesn’t know you’re operating a home-based business.
Get home-based insurance and use it as a small-business write-off.
Meals and Entertainment
As a small business owner, you can write-off most expenses that are used to help the business generate income. In addition to office supplies, which are 100% deductible, business expenses can also include meals and entertainment, but are 50% deductible. If you take a client out for dinner and to a baseball game, you can deduct 50% of the cost. Just make sure to keep all receipts.
For expenses that are both personal and business in nature, you can only write-off the portion of the costs that relate to the business. Under certain circumstances, you can write-off 100% of business expenses like meals or entertainment.
Depending on the medium, you can write-off a portion or all of your media advertising costs.
- Online Advertising: Online advertising is 100% deductible. This includes the website’s domain name registration and web hosting costs.
- Television and Radio Advertising: Television and radio advertising is also 100% deductible for Canadian stations.
- Magazines and Newspapers: Both mediums are fully deductible, but only under some strict conditions. To write-off 100% of the costs, at least 80% of the material in the magazine or newspaper must be journalistic in nature. This means advertising cannot take up a majority of the space. If the journalistic content is less than 80% in nature, only 50% of the costs can be written-off.
FBC, Helping Canadians Navigate the Purchase of a Business
Income tax rates are the same whether you’re a self-employed small business owner or work for someone else. That’s where the similarities end. As a small business owner, you can take advantage of a huge number of write-offs that the typical wage earner cannot. These write-offs can help reduce your tax burden and even put you into a lower tax bracket. To make sure you’re taking advantage of all the write-offs legally allowed by the CRA, contact the tax experts at FBC.
Since 1952, the tax professionals at FBC have worked exclusively with small business owners, farm operators, and independent contractors. Over those 65 years, FBC has helped clients from coast-to-coast navigate the often-confusing world of the Canada Revenue Agency, helping them write-off all the legal tax loopholes, minimize their tax obligations, and maximize their assets.
For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.