This is an overview of the business expenses that you can claim for income tax purposes:
A business expense is a cost you incur for the sole purpose of earning business income.
You have to support business expense claims with a sales invoice, an agreement of purchase and sale, a receipt, or some other voucher that supports the expenditure. If you pay cash for any business expenses, be sure to get receipts or other vouchers. Receipts should include the vendor's name and the date.
Remember to keep your cancelled cheques if you receive them from the bank. This is part of your proof that the bill was paid or the asset purchased. Keep the cancelled cheques in an orderly manner so we can easily review them. See Types of operating expenses and Motor vehicle expenses to learn about what you can claim.
Running a business from your home
You can deduct expenses for the business use of a work space in your home, if you meet one of these conditions:
- it is your main place of business
- you use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients
You can deduct part of your maintenance costs such as heating, home insurance, electricity, and cleaning materials.
You can also deduct part of your property taxes, mortgage interest, and capital cost allowance (CCA). To calculate the part you can deduct, use a reasonable basis, such as the area of the work space divided by the total area of your home.
Inventory and cost of goods sold
You need to do an annual inventory. This is usually a list of goods held for sale. If you are a manufacturer, this includes raw materials as well as packaging material and supplies, work-in-progress (goods and services that you have not yet completed at the end of your fiscal period), and finished goods that you have on hand. Inventory is used to calculate the cost of goods sold and net income on form T2125, Statement of Business or Professional Activities.
If you have a professional practice and you are an accountant, dentist, lawyer, medical doctor, notary, veterinarian, or chiropractor, you can elect to exclude your work-in-progress (WIP) when you determine inventory.
However, if you have a tax year that begins after March 21, 2017, you can no longer elect to exclude amounts for WIP. If you elected to use billed-basis accounting for the last tax year that started before March 22, 2017, the transitional rules allow you to include your WIP into income progressively.
Generally, for the first tax year that starts after March 21, 2017, you must include 20% of the lesser of the cost and the fair market value of WIP. The inclusion rate increases to 40% in the second tax year that starts after March 21, 2017, 60% in the third year, 80% in the fourth year, and 100% in the fifth and all subsequent tax years.
For more information, see guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
How to value your inventory
The value you place on the items in your year-end inventory is important in determining your income. For income tax purposes, the two acceptable methods of valuing your inventory are by determining:
- the fair market value of your entire inventory (use either the price you would pay to replace an item, or the amount you would get if you sold an item)
- the value of individual items (or classes of items, if specific items are not easy to distinguish) in the inventory, at their cost or their fair market value, whichever is lower
After you choose a method of inventory valuation, you have to continue to use the same method in later years. For more information, see Interpretation Bulletin IT-473, Inventory Valuation.
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