As a blanket statement, we suggest that sole proprietors keep every receipt and expense absolutely every penny they pay to earn business income.
Much of this is obvious. If you’re selling jewelry and you have to purchase the jewelry first…it’s easy to recognize that your cost is a business expense.
We’ll touch on a couple of the less obvious ones:
- Business use of home (cannot create a loss)
- Business use of vehicle (cannot use a straight mileage calculation)
- Leasing/interest or CCA on vehicle
- Bad debt
- Private health care plans –
- More than 50% of total income for the year is from the business or
- Income from other sources doesn’t exceed $10,000
- Must use a third party provider
- There are limits imposed by CRA as to how much you can deduct, if no other full-time employees. $1,500 for you and your spouse. $750 for dependants under 18.
- Meals – most of us are aware we can expense meals as a business expense. However, there are some misunderstandings as to what qualifies. GST on meals is only 50%. Tips are not included in GST calculation.
Some expenses that are NOT tax deductible:
- Personal expenses
- GST on business expenses, if you’re registered for GST
- Draws, or money that you pay yourself
- Charitable or political donations
- Interest and penalties from CRA
- Most other fines and penalties – WCB fines, speeding tickets, etc.
- Life insurance premiums (tax free)
- Club memberships – golf or health
- Fees for your own work
- Meals where business was not conducted
- Use of home phone
- Capital expenditures (must capitalize and write off)
We are sometimes asked, “I’ve got a bunch of expenses but not a lot of profit. How long can I show a loss and not raise flags with CRA?”
There is no magic timeline. Frequently, tax advisors will say three or five years. But, in truth there’s no time frame. CRA’s yardstick is, you must have a “reasonable expectation of profit”.
For example, my mom sold Shaklee products. In the beginning, she really did intend to make a profit. A couple years in, she still had a few customers but wasn’t really growing her business. She was attending seminars in Dallas and Vegas and had huge travel costs. She showed a loss of $16,000 on a few thousand of income. Did she really have a reasonable expectation of profit? I don’t think so.
If there is more personal gain than expectation of profit, your business will be considered a hobby. Read more from CRA on business expenses.