Write-offs are frequently a dilemma for some people. What should I write off, what shouldn’t I, and what qualifies as a write-off? Some are more liberal with their write-offs while others tend to be more conservative. So, what’s the safest approach?
The reality is there are grey areas when it comes to taxes. Nobody wants to trigger an audit, but we also don’t want our clients leaving anything on the table. In this blog, we will share insights for incorporated small businesses in Alberta.
Our advice is not applicable in any other jurisdiction and some may not be technically allowed in Alberta either, so, be sure to do your due diligence when researching your specific situation.
Grey areas in taxes arise when something’s not totally 100% business and not 100% personal. As a rule of thumb, if you’re spending money to make money, it’s a business expense. A lot of these areas are based on professional judgement about what’s reasonable in the circumstance.
Two main tax grey areas are home office and vehicle expenses. But, there are some that are explicitly identified as no-fly zones – we get to these at the end of the blog.
Home office expenses
If your home is your primary place of business and you have a business income, you can claim home office expenses.
The common method for home office expenses is to take the square footage of your home office space and divide it by the total square footage of your home. You can claim this percentage of your home expenses as a business expense. If you are working from, say, a dining room table or other non-dedicated home office space, you’d have to calculate the percentage of time you use that space for work.
TIP: Don’t claim more than 15% for home office if you want to fly under the radar of the CRA.
These are the home office expenses you will include in this calculation:
- Property taxes
- Interest on your mortgage payment (not your entire mortgage payment)
For example, if your home office is 120 square feet and the total square footage of your home is 1,200 square feet, you can claim 10% of the expenses listed above.
Home office grey areas
It’s important not to include home expenses in your home office calculation. These expenses should be calculated separately:
- Home internet: Internet is basically vital to running your business, so it’s reasonable to write off at least 50% of your internet costs.
- Security system: If you use a security system that you also need for your business, you may write off a larger portion.
- If you see clients at your home weekly, then your field of write-offs opens up to things like coffee, magazines, cleaning, snow shoveling, yard maintenance and more.
You should claim 100% of all supplies and furniture for a dedicated home office space: headphones, iPads, furniture, even houseplants! Any renovations to the space can also be considered a business expense.
If you use a garage or basement for your business that puts you above the 15% of total square footage, then rent this space to yourself instead of including it in home office expenses. You can claim home office expenses and ‘shop’ rent under different line items of the tax return. If you do claim rent, you’ll have to claim the income on your personal tax return. But, you can deduct a percentage of your home operating expenses (same as the categories above).
Insurance companies want to know if you have a home-based business. If your home insurance increases because of your business, the increase should be a 100% business expense, in addition to percentage for home office expenses.
Cell phone expenses
We generally advise claiming 50% of your cell phone bill – unless you have two phones, one personal and one business.
Cell phone grey areas
Your business might require you to have a more expensive cell phone plan (such as if you work in a remote area and use more data roaming, or you travel often and call long-distance). Potentially you can claim 50% of baseline plan and 100% of the additional plan. The same goes for internet.
If your business requires you to have a landline or fax line when you normally wouldn’t otherwise, you can write off 100%.
The pandemic caused a lot of lost mileage logs for business owners, forcing them to shell out unnecessary cash.
If your business uses a personally owned vehicle, your business can reimburse you for the kilometres driven for business. The amount is calculated based on the CRA’s posted per kilometre rates. The Canadian mileage rate for 2022 is $0.61/km for the first 5,000kms and $0.55/km drive beyond that.
You need to support the kilometres you claim on your taxes, and the best way to do that is to keep an immaculate mileage log. Use MileIQ to document every trip and log it as business or personal, or you can use our mileage reporting template in our Small Business Toolkit.
Vehicle expense grey areas
The dollars per kilometre rate works great if you have high business kilometres, and your vehicle is cheap to operate and not worth a ton. Think 30,000 on business kilometres in a 2010 Honda Civic.
If your corporation owns your vehicle, here are a few other tips:
- Lease the vehicle through your corporation. At the end of a lease term, if there’s an arbitrage opportunity you can buy out the vehicle personally, and turn around and sell it at a profit.
- Claim a few necessities like winter tires, gas, repairs and maintenance, and the odd carwash.
Other grey areas
- Claim Uber, taxi, Lime or bus transportation to any business function. If you can claim meals and entertainment as a business expense, then you can claim the ride or vehicle expense to and from that event.
- For a personal credit card that is used for business, how many points is reasonable for you to use personally? A CPA can help you make this assessment.
- Annual $500 tax-free gift for employees: If an owner is taking a wage, then they can also receive this gift. Remember it cannot be cash, or near-cash (gift cards).
- Out with friends who you also do business with? If you can explain the business purpose to a CRA agent, write this off. Also, write on your receipts, or note on your app who you were with and why.
- Try to align your holidays with business-related conventions or conferences. We’ll help you make a reasonable allocation between business and personal.
- For items that need to be purchased for business, but could also provide personal benefit, have the business buy it. For example, you need a hammer, measuring tape and level to hang some art in the office or assemble some office furniture? Seems like a business expense to me.
Here are some of the areas the CRA explicitly says no to:
- Green fees and golf memberships. These can be paid for by the business, but it is not deductible for tax purposes.
- You cannot deduct the value of your own labour on anything.
- You cannot claim expenses for things you were reimbursed for, especially insurance claims.
- Clothes for work (unless they are safety related or a uniform).
If you have questions, contact us any time.
Read more about Corporate Tax topics that may be helpful to you and your small business.