Tax deductions for home-based businesses in Canada

 

Running your business from home comes with advantages that go above and beyond the short commute.  

 One of them is that you can actually deduct some costs as business-use-of-home expenses. 

 Before you can start adding up any numbers, it’s important to understand your eligibility to make those deductions in the first place.  

 Can I get tax deductions? 

If you’re using your home as your primary place of business—and not conducting business somewhere else on top of that—then you’re probably eligible.  

 Check out the Canada Revenue Agency (CRA) guidelines to make sure your home-based business qualifies.. 

 If your business does qualify under these rules, you might be pleasantly surprised to learn about all of the expenses you could claim on your income tax return. Ka-ching. 

 

Start by calculating your deduction rate 

 To figure out your business-use-of-home expenses, start by measuring the amount of space in your home that is used for business purposes.  

 Let’s say you’ve converted a spare bedroom into your home business office, and it measures 300 sq. ft. And let’s say the total floor space in your home is 2000 sq. ft. That means 15% of your home is used for business purposes. 

 This is the percentage you can apply to certain home expenses, including: 

• Heat, hydro, cleaning services, security alarm monitoring, home telephone (if you use it for business purposes) 

• Home insurance, maintenance, and repairs 
• Rent or mortgage interest 

Modern accounting software will help you to claim applicable home-based business deductions. 

 

Organize your receipts 

 Pull together expense receipts for all items or services you purchased to run your business during the past taxation year.  

 Beyond the above business-use-of-home expenses, as with any business, the expenses you rack up in the pursuit of income are tax-deductible at full value.  

 While it’s a good idea to check the CRA website later for a list of eligible business expenses, here’s a quick summary: 

• Employee salaries, wages, and benefits 
• Office supplies (e.g., ink cartridges, printer paper, pens, pencils, and stamps) 

• Dedicated business telephone line 
• Professional fees paid to your lawyer, accountant, and consultants 
• Website design and hosting fees 
• A portion of meal and entertainment expenses incurred with customers or prospects 
• Marketing costs for money spent on advertising and social media 

 

Don’t forget to deduct motor vehicle expenses  

Working from home likely means you must travel to meet customers, visit suppliers, or pick-up supplies for your business. Remember to claim allowable vehicle-related expenses.  

• If you have a company vehicle used exclusively for business purposes, 100% of related costs are deductible from your business income tax 
• If you have a personal vehicle used for both business and personal travel, you can expense a portion of expenses used for business  

• To prove business use, keep a log of kilometres driven for business trips 

It’s worth taking some time to understand CRA rules for motor vehicle expense deductions. 

 

File your taxes on time 

 Late filing will often incur penalties and interest.  

 That’s why it’s important to know when your taxes are due, and make sure they’re paid on time.  

 Find out more about your business tax obligations and payment deadlines on the CRA website.  

 If you’re working with a professional accountant, be sure to submit your files and receipts well in advance of tax-filing deadlines so they have enough time to prepare your returns.  

 

Use accounting software to make life easier 

 Figuring out your tax obligations is a lot easier if you use cloud accounting software throughout the tax year.  

 In addition to keeping track of income and expenses, accounting software can generate monthly and annual financial reports filled with helpful insight into your business operations for better decision-making. 

 

What next? 

 Canadian tax rules can be complicated and can change pretty often. Consider working with a qualified tax specialist to prepare income tax returns for your home-based business. 

 

 (This information is intended for educational purposes only and should not be considered as tax advice. Always consult with a qualified tax specialist for advice specific to you and your business.)