Running a home based business in Canada is just like running any other business when it comes to income taxes. Assuming you have an income to write it off against and you follow the rules, you can deduct a host of business expenses, lowering the amount of income tax you have to pay.
But one of the advantages of running a home based business is that there are additional income tax deductions that you can claim. What follows is not an exhaustive list, but rather a list of some common Canadian home based business tax deductions. How many of these apply to you?
1) Automobile Expenses
Many Canadian home based business owners use their personal vehicles as business vehicles. That's all right tax-wise; you can still claim a raft of automobile expenses. Besides deducting the costs of fuel and oil, licensing, insurance and maintenance and repairs as a home based business owner (see T2125 Statement of Business or Professional Activities), you can also “deduct interest on money you borrow to buy a motor vehicle, automobile, or passenger vehicle you use to earn income” (Canada Revenue Agency).
Be aware, though, that there is a limit to the amount of interest you can deduct on money you borrow to buy a passenger vehicle. You can also deduct the cost of leasing a vehicle that you use to earn income.
Tax Tip: As you can deduct only a portion of your automobile expenses when you have a vehicle that you use for both business and personal use, the Canada Revenue Agency (CRA) recommends that you keep a record of the total kilometres you drive and the kilometres you drive to earn income to “support your claim”. In the example they give in Business and Professional Income, they actually use these figures to figure out how much the deductible business expenses are. (“Paul’s” business kilometres are divided by his total kilometres driven and multiplied by his total vehicle expenses to form the basis of his claim.)
As “you can deduct all regular commercial insurance premiums you incur on any buildings, machinery, and equipment that you use for your business”, (T4072 Small Business Information Seminar Module III Income Tax), home based business insurance should qualify.
Home based business insurance is essentially commercial in nature and is entirely separate from a person's home insurance. (In fact, if you are running a home based business and don’t have home based business insurance, you’re running the risk of not being covered at all if something happens, because running a home based business that your insurer is not aware of may invalidate your home insurance policy. For information on types of home based business insurance and how to save money on such a policy, see my article on Home Based Business Insurance.)
Tax Tip: You may also write off a portion of the cost of your home insurance if your home based business meets the conditions for claiming business-use-of-home expenses (see number 4 on the next page). If applicable, this expense would be part of the expenses that you claim on line 9945 of the T1 form).
3) Office Expenses
Even if your office is just a part of a counter in the kitchen, your home based business will have office expenses to claim. The catch here is to distinguish between office expenses (things such as pens, stamps and paper clips, which you claim on line 8810 of the T1 income tax form) and depreciable assets (things such as filing cabinets, printers, and other equipment which fall under the rules of Capital Cost Allowance).
Because depreciable assets wear out over time, you can only claim a portion of their original cost as a tax deduction each year. How much you can claim as a tax deduction depends on what the asset or property is; the Income Tax Regulations have divided depreciable assets into different classes with different percentage rates of Capital Cost Allowance. This Capital Cost Allowance hub on the Canada Revenue Agency's site includes a guide to the common classes of depreciable property.
Tax Tip: You don't have to claim Capital Cost Allowance in the year that it occurs and rolling your Capital Cost Allowance Claim forward may lower your taxes later on when you can use it to offset a higher income. For more on this see 8 Small Business Tax Strategies to Reduce Income Tax.
Continue onto the next page to read about three more home based business tax deductions that may apply to your income tax situation.