Types of operating expenses
In most cases you cannot deduct personal and living expenses. However, you can deduct travel expenses you incur in the course of carrying on a business while away from home.
The general rule is that you cannot deduct outlays or expenses that aren't related to earning business income.
The following may be considered when determining operating expenses:
- Prepaid expenses
- Accounting and legal fees
- Advertising expenses
- Business tax, fees, licenses and dues
- Insurance expenses
- Interest and bank charges
- Maintenance and repairs
- Meals and entertainment
- Office expenses
- Salaries, including employer's contributions
- Business start-up costs
- Motor vehicle expenses
A prepaid expense is an expense you pay ahead of time. If you use the accrual method of accounting, claim any expense you prepay in the year or years in which you receive the related benefit.
For more information, see interpretation bulletin IT-417, Prepaid Expenses and Deferred Charges.
Accounting and legal fees
You can deduct the fees you incurred for external professional advice or services, including consulting fees.
You can deduct accounting and legal fees for advice and help in keeping your books and records. You can also deduct fees for preparing and filing your income tax and GST/HST returns.
For more information, see interpretation bulletin IT-99-CONSOLID, Legal and Accounting Fees.
You can deduct expenses for advertising, which include ads in Canadian newspapers, on Canadian television and radio stations. You can include any amount you paid as a finder's fee.
Certain restrictions apply to the amount of the expense you can deduct for advertising in a periodical. You can deduct all the expense if your advertising is directed to a Canadian market and the original editorial content in the issue is 80% or more of its total non-advertising content.
You can deduct 50% of the expense if your advertising is in a periodical directed to a Canadian market and the original editorial content in the issue is less than 80% of its total non-advertising content.
You cannot deduct expenses for advertising directed mainly to a Canadian market when you advertise with a foreign broadcaster.
Business tax, fees, licences, and dues
You can deduct any annual licence fees and business taxes you incur to run your business.
You can also deduct annual dues or fees to keep your membership in a trade or commercial association. However, you cannot deduct club membership dues (including initiation fees), if the main purpose of the club is to provide dining, recreational, or sporting activities.
You can deduct all regular commercial insurance premiums that you pay for buildings, machinery, and equipment that you use for your business.
Interest and bank charges
You can deduct the interest you pay on money you borrow to run your business. However, there are some limits.
There is a limit on the interest you can deduct on money you borrow to buy a passenger vehicle or a zero-emission passenger vehicle. For more information, see the section "Motor vehicle expenses" in Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
There is also a limit on the amount of interest you can deduct for vacant land.
You can choose to capitalize the interest you pay on the money you borrow for any of the following purposes:
- to buy depreciable property
- to buy a resource property
- for exploration and development
For exploration and development, when you choose to capitalize interest, you add the interest to the cost of the property or the exploration and development costs.
Do not deduct the capitalized interest as a current expense. For more information, read "Interest" in guide T4002.
Maintenance and repairs
You can deduct the cost of labour and materials for any minor repairs or maintenance done to property you use to earn income. However, you cannot deduct the value of your labour.
You cannot deduct costs you incur for capital repairs. However, you may be able to claim capital cost allowance on repaired property.
For more information about capital cost allowance, see Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
Meals and entertainment
The maximum part you can claim for food, beverages, and entertainment expenses is 50% of either the amount you incur or an amount that is reasonable in the circumstances, whichever is less.
The 50% limit also applies to the cost of your meals when you travel or go to a convention, conference, or similar event. Special rules can, however, affect your claim for meals in these cases. For more details, read "Meals and Entertainment", "Convention expenses", and "Travel" in Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
For more information, see interpretation bulletin IT-518, Food, Beverages, and Entertainment Expenses.
You can deduct office expenses for small items such as pens, pencils, paper clips, stationery, and stamps. However, you cannot deduct expenses for capital items such as calculators, filing cabinets, chairs, and desks. These are capital items. For more information, see Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
Salaries, including employer's contributions
You can deduct the cost of salaries you pay to employees. You report each salary by the end of February on a T4 slip, Statement of Remuneration Paid, or T4A slip, Statement of Pension, Retirement, Annuity and Other Income. For more information on these slips, see the Guide T4001, Employer's Guide - Payroll Deductions and Remittances.
Business start-up costs
To deduct a business expense, you need to have carried on the related business in the fiscal period in which the expense was incurred. Because of this, you have to be clear about the date your business started.
Determining what you can claim as a start up expense can be difficult. For more information, see interpretation bulletin IT-364, Commencement of Business Operations, or Guide RC4022, General Information for GST/HST Registrants.
You can deduct expenses you incur to run a motor vehicle that you use to earn business income. However, several factors can affect your deduction.
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