Small Business Taxes FAQ

What kind of business records do I need to keep when I start my own business?

You should keep receipts and cancelled checks for all business expenses, for example:

• auto expenses

• rent

• utilities

• advertising

• travel

• entertainment, and

• professional fees

Keep these documents in individual folders or envelopes.  Most small business owners lose at audits or fail to comply with tax reporting obligations due to poor record keeping, not dishonesty. You might want to consider using a computer to help keep your records straight. 

If you are ever audited, Revenue Canada will likely look at deductions for travel, entertainment and automobile expenses.  The burden is on you to substantiate your deductions.

Is there a general definition for what is or is not a business expense?

Any "ordinary, necessary and reasonable" expense that helps you earn business income is deductible. This definition reflects the purpose for which the expense is made. A computer for your office or store is an "ordinary and necessary" business expense.  The property will be used in a "trade or business" and with the expectation of generating income.

How much of my automobile expenses can I write off?

In order to figure your deduction, you must first keep a detailed log of your mileage for each business use, always noting the purpose of the trip.  Should you ever be audited, you will be expected to produce such a log before any deduction will be allowed.   At the end of the year, you figure your deduction by using one of the formulas established by Revenue Canada for automobile deductions.  For help in looking up business tax information go to the Canada Customs and Revenue Agency site, business tax section, at  http://www.ccra-adrc.gc.ca/tax/business/smallbusiness/faq/bis/bis-e-04.html#p524_37546 .

Is it true that you can deduct 100% of the cost of some business supplies and equipment in the year they are purchased but there are others that must be deducted over several years?

Everyday costs for offices supplies, rent and electricity can be deducted from your business' total income in the year they were incurred.  Expenditures for items that will generate revenue in future years, e.g. a photocopier, automobile or furniture, must be written off over their useful life.   That period may be three, five or seven years as determined by Revenue Canada.

Someone told me that corporations get the best tax breaks.  Should I incorporate for that reason?

There is some truth to this.  However, most tax benefits flow to profitable, established businesses, not to start up operations in their first few years.  For example, corporations can offer more tax-flexible pension plans and greater medical deductions than sole proprietors or partnerships but few start-up businesses have the cash flow needed to take advantage of this tax break. Similarly, the ability to split income between a corporation and its owners (keeping income in a lower tax bracket) is only effective if the business is very profitable.  In addition, if you are not capable of doing it yourself, incorporating will entail additional filing fees, legal fees and accounting charges which may not be manageable by a start-up business.

Should I hire independent contractors or employees?

If your people are working full time for you and you are instructing then on where, when and how to do their jobs, you should treat them as employees, because that is how the Revenue Canada will classify them. Generally, you can treat workers as independent contractors only if they have their own businesses and offer their services to several companies, e.g. a computer repair man who works for a number of other small businesses.   If in doubt, err on the side of treating workers as employees.

While treating all workers as independent contractors will save you time and money initially because you don't have to keep track of employment records, file payroll tax forms or pay the employer's share of payroll taxes, it may get you into trouble if Revenue Canada audits you and reclassifies your "independent contractors" as employees.   If you do use independent contractors, make sure they sign an agreement stating that they are responsible for all employment taxes or other payroll deductions as well as GST and PST.   You will find a simple form of Independent Contractor Agreement in the Forms Store.

I don't have enough money to hire an accountant.  Is it safe for me to keep my own books?

If you are going to keep you own books, consider using a computer program such as Quicken (Intuit) to track your expenses. If you are doing your own tax return, use a companion tax program for business. To ensure that you are on the right track, it would be a good idea to ask a small business tax professional to go over your bookkeeping system.  It should only take a few hours for him or her to review your books and come up with suggestions to help you avoid the most common mistakes and show you how to conform your bookkeeping system to tax filing requirements.

When your business is firmly in the black, hire a bookkeeper to take care of day-to-day payables and receivables.  Use an outside tax professional to handle your more complicated tax work.  His or her fees are tax deductible and the chances are that you business will benefit from the professional advice.

I am thinking about setting up a consulting business with two friends.  Do we need a partnership agreement and does that make a difference in taxes?

If you go into business with other people and split the expenses and profits, under provincial or state tax laws you are operating a partnership whether you have signed a written agreement or not.  This means that you should file a partnership tax return every year  in addition to your individual tax return.

Even though a formal partnership agreement will not affect your tax status, you should have one in place in order to establish the partner's rights and responsibilities in the partnership.

For more information on partnerships, please read the free legal tutorial entitled entitled Small Business Legal Structure found in the Lean Law Library.

I heard that I can no longer claim a deduction for an office in my home.    Is this true?

No.  If you are  maintaining a home-based business and you conduct administrative or management business activities there, you can claim a deduction for the portion of the home used for business.  Whether you rent or own, you can also deduct a proportionate share of related costs such as utilities, insurance, or remodeling.

I am planning a business trip and want to take my family with me so we can vacation afterwards.  Can I still deduct expenses for the trip?

You can only deduct business expenses for yourself -- not members of your family.   If your family stays with you in the same hotel room, you could still deduct that expense, but you couldn't deduct any additional charge for a larger or more expensive accommodation for your family.  You can deduct the cost of your airline tickets and meals, but not for your family.  If you extend your stay after the business is over, any expenses attributed to the non-business days aren't deductible, unless you extended your stay to get discounted airfare (the "Saturday overnight" requirement). In this case, your hotel room and meals would be deductible.

For help in looking up allowable business tax deductions and information go to the Canada Customs and Revenue Agency site, business tax section, at  http://www.ccra-adrc.gc.ca/tax/business/smallbusiness/faq/bis/bis-e-04.html#p524_37546 .

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