Jan 20, 2020

Tax Tips for Sole Proprietor Businesses in Canada

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People often ask me, “What can I write off from my business income?” Here is a quick and easy guide to the basic deductions allowed for a sole proprietor business. A Sole Proprietor is a business in Canada that is not Incorporated (Inc or Ltd).

Business Expenses to Earn Business Income

The basic rule is that expenses you can write off for your business should have been expenses necessary to earn business income, meaning that the expense is related to your business operations. This can mean something different for every business. For example, a private hockey coach could write off ice skates, whereas a wedding planner could not. The general sole proprietor business expense categories are as follows:

• Purchases – Cost of Goods Sold
• Advertising
• Meals & Entertainment – Deductible at 50% of total for business meetings
• Insurance – Business or Liability
• Interest & Bank Charges
• Business Fees, Licences, Dues
• Office Expenses
• Supplies
• Legal & Accounting Fees
• Management & Admin Fees
• Rent – For office or workshop space
• Maintenance & Repairs – To equipment or to rented space
• Salaries & Wages – Includes Employer portion of CPP/EI paid and company-paid benefits premiums
• Subcontractors
• Travel – Ferries, Flights, Hotel, Meals while travelling for a business purpose e.g. conference
• Telephone & Utilities
• Equipment Diesel, Fuel, Oil
• Delivery & Freight

You need to provide your accountant with annual totals at tax time. If you are not using a computerized accounting software, such as QuickBooks Online, We have an easy to use template spreadsheet for small business expenses! We can provide this free of charge to Deximal small business tax clients. Our professional tax preparation service is 100% online and paperless so we are able to help small business owners and individuals across Canada with their personal tax and small business tax returns.

Business Use of a Personal Vehicle

You can write off expenses for your vehicle if you are using it for business travel. Some examples of business travel would be to pick up supplies, go to a meeting or conference, or deliver items to your customers. You are meant to track your business mileage in a mileage logbook. If you hate recording trips in a paper notebook you can use a mileage tracking app like MileIQ (free for less than 40 trips per month). If you are using a paper notebook, you must also record your odometer total at December 31 every year to get a total of Km driven in the year, including personal mileage. Some of the auto expenses will be pro-rated by business use percentage based on the mileage calculation.

The Auto expense categories are as follows:

• Fuel
• Insurance
• Maintenance
• Parking Fees
• Lease Payments or Auto Loan Interest

Business Use of Home Office Expenses

You can write off a portion of your home expenses if you are using a home office or workshop/studio. You are meant to be using this space to be meeting with your customers for it to be deductible OR it has to be your only workspace. The business use percentage is calculated by taking your home office square footage divided by the total square footage of your home.

The expense categories for Business Use of Home expenses are as follows:

• Heat
• Electricity – If your heat is electric put it in this category
• Home Insurance
• Maintenance – Including property maintenance
• Mortgage Interest – Do not include the principal portion of your mortgage
• Property Taxes
• Rent – If you rent instead of own your home
• Phone & Internet
• Other Utilities – Water bills, garbage pickup

Capital Asset Depreciation for Small Business in Canada

Finally, any large equipment that you purchase for your business can be depreciated over time. On sole proprietor business tax returns we call this Capital Cost Allowance (CCA). Depreciation means the original cost of that item is expensed over time, instead of all in one year. Depreciable property can be items such as furniture, equipment, or vehicles to use in your business. Generally, any tools over $500 should be put on the CCA Schedule of your small business tax return. It is expected that these items will last for many years and so their total cost is spread out over time. Your accountant will need the purchase date, purchase price, and a description of the Capital Asset.

Personal Tax Deadlines in Canada

It’s now the 2019 personal tax season, the time of year when individuals and sole proprietor business owners gather together their tax slips and business income and expenses. Remember that the personal income tax deadline is April 30th, 2020 and the sole proprietor business income tax deadline is June 15th, 2020. The sole proprietor business income tax deadline is applicable to you if you have self-employed business or farming income (or your spouse does, even if you do not, and you are filing together). It is important to note, however, that all income tax payable is due by April 30th, 2020, so in practice, many business owners prefer to file their taxes before April 30 so they can find out how much they owe. Another option is to prepay an amount to income tax to avoid interest on the balance owing and then you can wait until after April 30th to file and still get it in on time before June 15th.