5 Common Myths About Canadian Income Tax Business Deductions
What Small Business Owners Have to Know About Canadian Income Tax
People think that running a business is a great tax break because you can write off all your expenses. Unfortunately that is just one of the common myths about Canadian income tax. The truth is that writing off business expenses is only possible if you meet all the requirements as defined by the tax authorities. And then there’s the whole business of collecting and remitting Canadian sales tax, which some people think you aren't required to do if you are running a small business.
When it comes to business taxes, ignorance is definitely not bliss; if you’re not aware of the ins and outs of Canadian income tax, and don’t comply fully with the tax rules, you can end up facing costly penalties. Hopefully you didn’t fall for any of these myths about running a business and your tax obligations in Canada:
Myth # 1: But it’s not a business, really...
You may be running a business, tax-wise, and not even know it. The misconception is that “making and selling a few things” doesn’t qualify as a business, or that if you do something as a hobby, it’s not really a business, even though you’re producing and selling things.
The Canada Revenue Agency (CRA) does not determine what is and what isn’t a business by the volume of sales or by your intentions; they define a business as "any activity that you do for profit". So even if you’re only “making and selling a few things”, you are running a business and need to file your business taxes accordingly.
Myth # 2: Small businesses don’t need to collect and/or remit GST/HST or Canadian sales tax (PST).
This is another myth based on the misperception that the size of your business matters when it comes to business taxes. When it comes to collecting and remitting GST/HST, there is a Small Supplier exemption, but even this does not apply to all types of businesses.
When it comes to provincial sales taxes (PST, also known as RST in Manitoba, or QST in Quebec), if you are selling tangible products, you have to collect and remit PST (unless your small business qualifies for one of the few exemptions).
Worse, your business doesn't have to reside in a province to be expected by that province's government to collect and remit PST/RST or QST for that province. As you'll read in What Business Owners Should Know About Provincial Sales Tax , all you have to do to be on the hook for these taxes is to be doing business in that province - something that the various provinces define quite loosely. Just accepting orders from a particular province can be enough.
These articles detail the process of collecting and remitting provincial sales taxes in the provinces that still have them (except Quebec).
- What Canadians Should Know About BC Provincial Sales Tax
- How to Charge Manitoba Retail Sales Tax (RST)
- How To Charge and Remit Provincial Sales Tax in Saskatchewan
- Current GST/HST and PST/RST/QST Rates for all Provinces and Territories
If you are shipping to Quebec or if your business resides in that province, see GST/HST and QST on the Revenue Quebec site.
Myth # 3: If you run a home-based business, you can write off all the expenses related to your home on your Canadian income tax.
In a word, No. While there are some business tax deductions that are specific to home-based businesses (such as the business-use-of-home tax deduction), running a home-based business does not allow you carte blanche business tax deductions. Excessive expense claims related to the use of your home for business purposes may lead to closer scrutiny by the Canada Revenue Agency (CRA). If your business ends up being audited your home expense claims may be disallowed for the current (and prior) years, leading to an expensive tax bill.
You can use some of your home maintenance and home ownership costs as business tax deductions (see Home Business Tax Deductions for details), but generally, the rules for business tax deductions for home-based businesses are the same as for any other business.
Myth # 4: If I operate a business, I can write off all my entertainment expenses.
If only this were true! But unfortunately, the rules for business tax deductions relating to entertainment are stringent (and perhaps stingy). Generally, you can only claim up to 50 percent of the cost of meals and/or entertainment as a business expense. (Special rules apply to meals and entertainment at conventions; see The Rules for Meals and Entertainment Expenses on Canadian Income Tax.)
And when it comes to activities such as golfing, the news is even worse; club membership dues are not deductible when “the main purpose of the club is dining, recreation, or sporting activities” (CRA Business and Professional Income Guide).
Myth # 5: If I operate a business, I’ll be able to write off all the equipment I buy for my business.
Well, sort of. The equipment you buy to operate your business (including everything from machinery through furniture), is depreciable, meaning it will wear out over time. So when you buy what the CRA calls a “depreciable property”, you can’t deduct the entire cost of the item as a business tax deduction; instead you deduct the cost of the item over several years through a Capital Cost Allowance claim.
How much of a Capital Cost Allowance claim you can make each year for a particular item depends on what class it is. Furniture, fixtures and machinery, for instance, are Class 8 in the Other Property category, meaning that you can deduct 20 percent of their cost each year. Capital Cost Allowance for Depreciation (CCA) provides a Capital Cost Allowance Classes Chart that will show you what depreciable property belongs in each class.
And see Tax Strategies To Maximize Your Business Tax Deductions for information on how to make the most of your Capital Cost Allowance (CCA) tax claim.
Unicorns Are No Help
Myths are pretty things and can be entertaining. But if you let them influence how you handle your business taxes, you're headed for trouble.
Instead, learn as much as you can about Canadian income tax and how it affects your business; there are things you can do to minimize the tax bite. Knowing the truth about the tax myths above will not only help you ensure that you comply with tax rules, but give you a starting point for successful tax planning.