Starting a side-gig, freelance work, or small home-based business is a great way to supplement the income you make from your main employment. After I began providing part-time web design services, I became interested in how to ensure I could protect my net income, expense the appropriate costs, and minimize my taxes.
To achieve the above, I researched small business deductions and tax write-offs available to home-based businesses in Canada. According to the Canada Revenue Agency (CRA) –
In general you can deduct any reasonable current expense you paid or will have to pay to earn business income.
Home Office/Self-Employed Tax Deductions in Canada
Here are some of the more common expenses you can deduct from your home-based business income:
1. Business Use Of Home Expenses
You can deduct business-use-of-home expenses based on the proportion of your home that is being used as office space. To claim this expense, your home either has to be your principal place of business; or you use the space only to earn business income and use it on a regular and ongoing basis.
To calculate how much of your home expenses are deductible, divide the area of your home office by the total area of your home. For example, say your home is 2,000 sq. ft. and your office space is 200 sq. ft. The calculation shows that 10% of some home expenses may be eligible as deductions. If your home office also serves other personal purposes, you should calculate the proportion of business to personal use and apply it to the calculation above.
Deductible expenses include heating, electricity, water, home insurance, mortgage interest, cleaning supplies, property taxes, repairs, and maintenance.
2. Home Office Supplies, Fixtures, and Equipment
Office supplies such as printer paper, paper clips, pens, postage, ink cartridges, etc. are fully deductible. Office fixtures and equipment including desks, chairs, filing cabinets, computers, lamps, software, and such are considered to be capital items and can be depreciated over a number of years based on Capital Cost Allowance rules.
3. Vehicle Expenses
If you use your car for business purposes, for example, travelling to meet clients, going to purchase office supplies, visiting your accountant or attending training, you can deduct some of your vehicle expenses. It’s essential you keep a detailed travel log indicating dates, destination, purpose, and distance travelled.
Expenses that are deductible include fuel costs, parking tickets, insurance, leasing costs, maintenance, and repairs. Deductible expenses should be based on the business percentage use. Expenses incurred from using the vehicle for your personal errands does not count.
You can also deduct depreciation on the car if you own it (up to 30% per year).
Costs incurred from advertising your home business can be expensed. The amount deductible varies depending on the type of advertising:
- Canadian newspapers, television, and radio: 100% deductible
- Online advertising: 100% deductible
- Business cards: 100% deductible
- Print – periodicals and magazines: 100% if editorial content is 80% or more; 50% if editorial content is less than 80%
- Foreign broadcasters: Not deductible.
5. Meals and Entertainment
50% of the amount you spend on business-related meals and entertainment is deductible. If the entertainment relates to staff events or parties (up to 6 events/year) or fund-raising events benefiting a registered charity, 100% of the cost can be deducted.
6. Accounting, Legal and other Professional Fees
Fees paid to lawyers, accountants, and other business consultants are fully deductible.
7. Business Insurance
Premiums for any specific insurance taken to cover your business operations, liability, or equipment, are considered a deductible expense. Life insurance premium cannot be deducted unless your life insurance policy is used as collateral for a business loan.
8. Interest on Loans
Interest paid on money borrowed to finance your business is deductible.
9. Trade Shows and Business Conventions
You can deduct the cost of attending up to two conventions a year. The convention should relate to your business.
10. Charitable Donations
Similar to your personal charitable donations, you can claim a deduction for charitable donations made by your business (up to 75% of your net income).
Note: Business-Use-of-Home Expenses and charitable donations cannot be used to create or increase a loss for your business. However, eligible expenses not covered by income in a current year can be carried forward indefinitely and deducted in future years.
Managing your business financial accounts and filing a tax return can be challenging. To make life easier for you, ensure that you keep good records and all receipts! Ensure you take advantage of all the available home office expenses so you can maximize the tax benefits of starting a home-based business.
TurboTax Free is a great software for filing your taxes, and if you are filing more complicated returns including those with freelance income, you can take a look at their Self-Employed package (20% discount link). If things get too complicated or you’re unsure of how to proceed, it is best to consult with your accountant.
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