You may have self-employment income from a business, a profession, commission, farming, or fishing.
Business income includes income from any activity you do for profit or with reasonable expectation of profit. A business includes:
Employment income is not business income.
For more information about calculating and reporting your self-employment income or loss, we are redirecting you to the Business Web site.
As a rule, you can deduct any reasonable current expense you paid or will have to pay to earn business income. The expenses you can deduct include any GST/HST you incur on these expenses less the amount of any input tax credit claimed. However, you cannot deduct personal expenses.
Deduct only the business part of expenses from business income. In addition, you cannot claim expenses you incur to buy capital property.
For more details, see list of expenses below.
Note
When you claim the GST/HST you paid on your business expenses as an input tax credit, reduce the amounts of the business expenses you show on Form T2125, Statement of Business or Professional Activities, by the amount of the input tax credit. Do this when the GST/HST for which you are claiming the input tax credit was paid or became payable.
Similarly, subtract any other rebate, grant, or assistance from the expense to which it applies. Enter the net figure on the proper line. Any such assistance you claim for the purchase of depreciable property used in your business will affect your claim for capital cost allowance.
If you cannot apply the rebate, grant, or assistance you received to reduce a particular expense, or to reduce an asset's capital cost, include the total on line 8230 in Part 3 of Form T2125.
You can deduct expenses for advertising, including ads in Canadian newspapers and on Canadian television and radio stations. You can also include any amount you paid as a finder's fee.
However, certain restrictions apply to the amount of the expense you can deduct for advertising in a periodical. If your advertising is directed to a Canadian market and the original editorial content in the issue is:
You cannot deduct expenses for advertising directed mainly to a Canadian market when you advertise with a foreign broadcaster.
Annual allowance on eligible capital property
You may buy property that does not physically exist but gives you a lasting economic benefit. Some examples are goodwill, franchises, concessions, or licences for an unlimited period. We call this kind of property eligible capital property. The price you pay to buy this type of property is an eligible capital expenditure.
You cannot deduct the full cost of an eligible capital expenditure, since it is a capital cost and provides a lasting economic benefit. However, you can deduct part of its cost each year. CRA call the amount you can deduct your annual allowance.
CRA consider franchises, concessions, or licences with a limited period to be depreciable properties, not eligible capital properties.
Bad debts
You can deduct an amount for a bad debt if you:
Business start-up cost
For an amount to be deducted as an expense incurred for the purpose of gaining or producing income from a business or profession, the taxpayer must have been carrying on business in the fiscal period in which the expense was incurred.
Where a taxpayer proposes to undertake a business and makes some initial expenditures with that purpose in mind, it is necessary to establish whether the expenditure preceded the start of the business or whether the business had in fact begun and there were expenses incurred during preliminary steps leading to the start of normal operations.
Consequently, the date when the business can be said to have commenced must be known.
Business taxes, fees, licences, dues, memberships and subscriptions
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.
Business-use-of-home expenses
You can deduct expenses for the business use of a work space in your home, as long as you meet one of these conditions:
You can deduct a part of your maintenance costs such as heating, home insurance, electricity, and cleaning materials. You can also deduct a part of your property taxes, mortgage interest, and capital cost allowance. 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.
If you use part of your home for both your business and personal living, calculate how many hours in the day you use the rooms for your business, then divide that amount by 24 hours. Multiply the result by the business part of your total home expenses. This will give you the household cost you can deduct.
If you run the business for only part of the week or year, reduce your claim accordingly.
The capital gain and recapture rules will apply if you deduct capital cost allowance on the business use part of your home and you later sell your home.
If you rent your home, you can deduct the part of the rent and any expenses you incur that relate to the workspace.
The amount you can deduct for business use of home expenses cannot be more than your net income from the business before you deduct these expenses. In other words, you cannot use these expenses to increase or create a business loss.
You can deduct the lesser of the following amounts:
In your next fiscal period, you can use any expense you could not deduct in the current year, as long as you meet one of the two previous conditions. You also use the same rules.
You can use the chart "Calculation of business-use-of-home expenses" on page 3 of Form T2125 to calculate your allowable claim for business-use-of-home expenses.
Capital cost allowance (CCA)
You might acquire a depreciable property to use in your business or professional activities, such as:
You cannot deduct the cost of the property when you calculate your net business or professional income for the year.
However, since these properties wear out or become obsolete over time, you can deduct their cost over a period of several years. The deduction for this is called capital cost allowance (CCA).
Delivery, freight, and express
You can deduct the cost of delivery, freight, and express incurred in the year that relates to your business.
Fuel cost
You can deduct the cost of fuel (including gasoline, diesel, and propane), motor oil, and lubricants used in your business.
Interest
You can deduct interest incurred on money borrowed for business purposes or to acquire property for business purposes. However, some limits can apply.
There is a limit on the interest you can deduct on money you borrow to buy a passenger vehicle.
There is also a limit on the amount of interest you can deduct for vacant land. Usually, you can deduct interest up to the amount of income from the land that remains after you deduct all other expenses. You cannot use any remaining amounts of interest to create or increase a loss. Also, you cannot deduct interest from other sources of income.
You can deduct the fee you pay to reduce the interest rate on your loan. You can also deduct any penalty or bonus a financial institution charges you to pay off your loan before it is due. Treat the fee, penalty, or bonus as prepaid interest (see Prepaid expense) and deduct it over the remaining original term of your loan. For example, if the term of your loan is five years and in the third year you pay a fee to reduce your interest rate, treat this fee as a prepaid expense and deduct it over the remaining term of the loan.
You can deduct certain fees you incur when you get a loan to buy or improve your business property. These fees include:
You deduct these fees over a period of five years, regardless of the term of your loan. Deduct 20% in the current year and 20% in each of the four following years. The 20% limit is reduced proportionally for fiscal periods of less than 12 months. However, if you repay the loan before the end of the five-year period, you can deduct the remaining financing fees then. The number of years for which you can deduct these fees is not related to the term of your loan.
If you incur standby charges, guarantee fees, service fees, or any other similar fees, you may be able to deduct them in full for the year you incur them. To do so, they have to relate only to that year. For more information, see Interpretation Bulletin IT-341, Expenses of Issuing or Selling Shares, Units in a Trust, Interests in a Partnership or Syndicate, and Expenses of Borrowing Money.
You may be able to deduct interest expenses for a property that you used for business purposes, even if you have stopped using the property for such purposes because you are no longer in business.
You can deduct interest you paid on a loan made against an insurance policy, as long as the insurer did not add the interest you paid to the adjusted cost base of the insurance policy. To claim the interest you paid for the year, have the insurer verify the interest before June 16 of the following year on Form T2210, Verification of Policy Loan Interest by the Insurer.
You can choose to capitalize interest on money you borrow:
When you choose to capitalize interest, add the interest to the cost of the property or exploration and development costs instead of deducting the interest as an expense.
Legal, accounting, and other professional fees
Deduct the fees you incurred for external professional advice or services, including consulting fees.
You can deduct accounting and legal fees you incur to get advice and help in keeping your records.
You can also deduct fees you incur for preparing and filing your income tax and GST/HST returns.
You can deduct accounting or legal fees you paid to have an objection or appeal prepared against an assessment for income tax, Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) contributions, or Employment Insurance premiums. However, the full amount of these deductible fees must first be reduced by any reimbursement of these fees that you have received. Enter the difference on line 232 of your income tax return. If you received a reimbursement in the current year for the types of fees that you deducted in a previous year, report the amount you received on line 130 of your income tax return for this year.
You cannot deduct legal and other fees you incur to buy a capital property. Instead, add these fees to the cost of the property.
Management and administration fees
You can deduct management and administration fees incurred to operate your business, including bank charges.
Motor vehicle expenses (automobile)
You can deduct expenses you incur to run a motor vehicle you use to earn business income
You can deduct motor vehicle expenses only when they are reasonable and you have receipts to support them.
To get the full benefit of your claim for each vehicle, keep a record of the total kilometres you drive and the kilometres you drive to earn business income.
For each business trip, keep a log listing the following:
Record the odometer reading of each vehicle at the start and end of the fiscal period.
If you change motor vehicles during the fiscal period, record the dates of the changes and the odometer reading at the time you buy, sell, or trade the vehicle.
If you use more than one motor vehicle for your business, keep a separate record for each vehicle that shows the total and business kilometres you drive, and the cost to run and maintain each vehicle. Calculate each vehicle's expenses separately.
If you use a motor vehicle for business and personal use, you can deduct only the part of the expenses that you paid to earn income.
However, you can deduct the full amount of parking fees related to your business activities and supplementary business insurance for your motor vehicle.
To support the amount you can deduct, keep a record of the total kilometres you drive and the kilometres you drive to earn income.
Office expenses
You can deduct the cost of office expenses, such as:
Prepaid expenses
A prepaid expense is an expense you pay for ahead of time. Under the accrual method of accounting, claim any expense you prepay in the year or years in which you get the related benefit.
Example
Suppose your fiscal year-end is December 31, 2009. On June 30, 2009, you prepay the rent on your store for a full year (July 1, 2009, to June 30, 2010). You can only deduct one-half of this rent as an expense in 2009. You deduct the other half as an expense in 2010.
Property taxes
You can deduct property taxes you incurred for property used in your business. For example, you can deduct property taxes for the land and building where your business is situated.
Rent
You can deduct rent incurred for property used in your business. For example, you can deduct rent for the land and building where your business is situated.
Salaries, wages, and benefits
You can deduct gross salaries and other benefits you pay to employees.
You can also deduct any premiums you pay for an employee for a sickness, an accident, a disability, or an income insurance plan.
You can deduct the salary you pay to your child, as long as you meet all these conditions:
Keep documents to support the salary you pay your child. If you pay your child by cheque, keep the cancelled cheque. If you pay cash, have the child sign a receipt.
Instead of cash, you may pay your child with a product from your business. When you do this, claim the value of the product as an expense and add to your gross sales an amount equal to the value of the product. Your child has to include the value of the product in his or her income.
You can also deduct the salary you pay to your spouse or common-law partner. When you pay your spouse or common-law partner a salary, use the same rules that apply to paying your child. However, you cannot claim as an expense the value of board and lodging you provide to your dependent children and spouse or common-law partner.
Report the salaries you pay to your children and spouse or common-law partner on T4 slips, the same as you would for other employees.
Supplies
You can deduct the cost of items consumed indirectly to provide the business's goods or services, such as the drugs and medication used in a veterinary operation, or cleaning supplies used by a plumber.
Telephone and utilities
You can deduct expenses for telephone and utilities, such as gas, oil, electricity, and water, if you incurred the expenses to earn income.
Travel
You can deduct travel expenses you incur to earn business and professional income. Travel expenses include:
In most cases, the 50% limit applies to the cost of meals, beverages, and entertainment when you travel.
The 50% limit also applies to the cost of food and beverages served and entertainment enjoyed when you travel on an airplane, train, or bus, when the ticket price does not include such amounts.
Other expenses
Some of the more common other expenses are:
