As you prepare to file your tax return at the end of the year, you may be entitled to deduct operational costs that you paid to run your business. To ensure that you take the maximum amount of deductions that your business is eligible for, it is important to keep your financial books and records up to date. This will help you to identify deductible expenses and evaluate your expected tax liability. Doing this before the end of the year can help with tax planning.
Business owners have a variety of deductions that they may take. Below we have included some of the most common ones.
Advertising and Promotion – Whether you promote your business online, in print, or on the radio, you may be able to deduct these amounts on your tax return.
• The amounts that you pay to host your website, pay-per-click ads, and other online ads can typically be deducted in full.
• Print advertisements that are run in a Canadian magazine can be deducted in full. Newspaper advertisements may only be deducted in full if the newspaper is Canadian and the total advertisements within the paper make up 20% or less of the total content with the remaining 80% being editorial in nature. If the advertisements exceed 20%, then your deduction will be limited to 50%.
• The cost of running television and radio advertisements can be deducted in full as long as the show is Canadian.
• Promotional expenses can typically be deducted in full. These include expenses such as the printing of brochures, merchandise that is branded with your company name or logo that is given out for free, or the cost of running a seminar.
Bad Debts – If you billed a client but were never paid, this amount can be deducted on your tax return if you already recorded this as income in the current or prior year. If you have not already included this as income, no allowance for a bad debt can be taken.
Bank and Interest Charges – The fees that you pay to the bank on your business accounts are deductible for tax purposes. If you were you charged by the bank, this may also be deducted.
Insurance – Payments made toward insurance policies that are used to secure the assets and operations of a business are generally deductible. These include premiums paid for business interruption, liability, and property policies. Premiums paid toward life insurance policies are not deductible unless the policy was used to secure a business loan.
Interest Expense – If you have taken out a loan with the intent to benefit your business, the interest that you paid can be deducted. Keep in mind that if the loan was used for personal reasons, any interest paid cannot be deducted on your return.
Legal and Accounting Fees – Fees paid to attorneys or accountants can be deducted if the services rendered were in connection with your business.
Meals and Entertainment – Amounts that you pay for meals and entertainment expense can be deducted up to 50%. If the meal is considered excessive, however, the amount that can be deducted will be limited to 50% of what a reasonable expense would be.
Exceptions to this rule include:
• If you own a restaurant or hotel and regularly provide meals to customers in the course of your business, the 50% limit does not apply.
• If you include the cost of the meal on an invoice to your customer, the meal expense deduction will not be limited to 50%.
• Meals served at fund-raising events are not limited if they were incurred to benefit a charity.
• Meal expenses that are incurred for an office party may be fully deductible if you invite all employees from a specific location to attend. There is a limit of six events of this nature each year.
Entertainment expenses may be deducted up to 50% of the cost. This includes costs incurred for tickets to sporting or other events, renting out a room, and gratuities.
Different rules may apply to meals for individuals who are self-employed, fishers and their crew, and truck drivers who travel for a continuous 24 hour period. You can learn more about these deductions here.
Rent Expense – Office lease payments are deductible on your tax return.
Repairs and Maintenance Expense – Amounts that you pay to maintain or repair equipment or property can be deducted. If you are making repairs to a building, they must be incidental in nature. If the amounts paid will extend the useful life of the asset, it would not be considered a repair and maintenance expense. Rather, this would be included in the calculation of depreciation expense under the tangible property.
Salaries and Wages – Amounts paid to employees for wages are fully deductible. Other related employee expenses, such as payroll taxes and insurance, are deductible as well.
Shareholder Loan Repayments – Any loan that is made by a shareholder to a company is not considered to be taxable income. When the company repays the loan, it is not considered income to the shareholder, nor can the company take a deduction. However, if you charge the company interest on a shareholder loan, interest payments the company makes are deductible on a corporate tax return. Keep in mind, however, that interest payments received by you personally will be considered taxable income to you.
Tangible and Intangible Assets – Assets that have a useful life beyond one year are considered tangible or intangible assets.
Tangible assets include such things as buildings, equipment, and vehicles. These assets are written off through a depreciation expense deduction using the Capital Cost Allowance (CCA). Under the CCA, assets fall under certain classes, which determine the percentage of depreciation that can be deducted each year.
Intangible assets include patents, goodwill, and trademarks. Assets that were acquired on or after January 1, 2017, are deducted at a rate of 5% each year until fully amortized.
Taxes – A business can pay several types of taxes. Income tax, property tax, and payroll tax can be deducted.
Travel Expense – Expenses that you pay for traveling on a business trip are deductible. This includes airfare, taxis, rental cars, and trains. Overnight stays at a hotel are fully deductible. In addition, 50% of amounts paid for meals are deductible. Expenses that were incurred for personal travel are not deductible.
Vehicle Expense – If you use your personal vehicle for business reasons, you may deduct a percentage of expenses incurred.
Your deduction is based upon the ratio of:
Total kilometers driven for business purposes / Total kilometers driven
Expenses such as gas, oil, repairs, and registration fees may be deducted based upon this percentage. Certain expenses, however, such as parking fees are fully deductible.
To learn more about the deductibility of your expenses, visit the Canadian Revenue Agency here.
You can start preparing for your year-end tax return now. Strive to keep your bookkeeping records current, as it will help you to identify potential tax deductions and plan for the year-end. Be sure to keep invoices, receipts, and detailed logs of kilometers driven for business purposes to support your deductions. If you lack the appropriate documentation, your deduction may be disallowed.
If you have fallen behind in your bookkeeping and need help, contact the professionals at Valley Business Centre. Since 1990, we have helped small and medium-sized businesses with their bookkeeping and payroll need. Serving clients in the BC area and beyond, we offer reliable and timely service. For more information, contact the bookkeeping specialists at Valley Business Centre today.
How to Pay Your Shareholders
If you are an owner/shareholder, you may be wondering how to take out money from your company. Perhaps the company has excess cash on hand or you are in need of funds for living expenses. How you are compensated as a shareholder will impact what expenses the company can deduct, as well as the taxability of the payment to the shareholder. With this in mind, it is important to consider the intent of the payment, as well as its taxable impact on both the company and its shareholders.
Shareholders can receive payments from a company through salary, dividends, or in the form of a loan. A brief discussion of each method follows:
Payments to a Shareholder as Salary
In many cases, a shareholder may play an active role in a company. As such, they may be paid a salary for their services. Salary payments are taxable as income to the shareholder and are tax deductible for the company. The appropriate taxes are withheld from a shareholder’s paycheck and remitted to the Canadian Revenue Agency(CRA) as required. At the end of the year, the shareholder will receive a T4 slip, which will document the amounts paid and taxes or other items withheld from their salary.
Family members of shareholders may also be paid a salary. Amounts paid as salaries to shareholders and their family members should be reasonable based on the services being provided, as well as the amount paid. The salary expense for shareholders or their family members that are considered excessive by the CRA may not be fully deductible by the company.
Many companies opt to pay a salary to a shareholder as a means to keep their overall tax rate in a lower bracket. If you are an owner/shareholder and actively participate in the operations of a company, this may help to keep the company’s taxable income under the small business threshold rate of $500,000.
If you choose to pay a shareholder a salary, however, there are other expenses that should be evaluated.
Expense Payments– If you pay personal expenses on behalf of a shareholder, this is considered taxable income to them. The company would determine the value of the benefit received by the shareholder and include this as taxable income.
In some cases, these expenses can represent a combination of business expense and personal benefit. A company should evaluate the amount for both personal and business expenses and keep proper documentation to support this calculation. Documentation can include receipts, invoices, or other supporting materials.
The CRA can challenge this allocation, which may mean that the shareholder would need to pay more tax on any additional amounts that are considered to be personal expenses paid on their behalf. Therefore, keeping receipts, invoices, as well as any other written documentation is necessary.
Canadian Pension Plan– A company is required to match the contribution made by the employee into the Canadian Pension Plan, or CPP. If a shareholder is paid a salary, the company would be required to match any contribution made. CPP contributions are limited based on the earned income of a shareholder.
Employment Insurance– If the shareholder owns at least 40% of the stock of the company, no contribution is required to be made by the company. However, if the ownership is less than 40%, payment into the Employment Insurance (EI) fund will be necessary.
Family members of a shareholder who owns at least 40% of the company may also fall under this exemption if their position is not considered arm’s length and the job would not have been held by a person that is not related to the company.
Even if the ownership percentage is 40% or more, the company can choose to pay into the EI fund on behalf of shareholders.
Employer Health Tax– Effective January 1, 2019, British Columbia implemented the Employer Health Tax(EHT) provision whereby a company pays in a percentage of its total salaries and benefits into a fund. This tax is required if the total salaries and benefits exceed the threshold of $500,000. The amount that is greater than $500,000 is taxed at a rate of 2.925%. This rate applies up to $1,500,000 in total remuneration. Benefits paid in excess of $1,500,000 are taxed at a rate of 1.95%. All salaries paid by the company are included in this determination, even those paid to shareholders.
In addition to salaries, other payments such as contributions to an individual’s registered retirement savings plan are included in the determination of total salaries and benefits paid by the Company.
Payments to Shareholders as Dividends
A dividend is a payment made to shareholders out of a company’s accumulated earnings. They are paid out according to the percentage ownership that each shareholder has.
The benefit of paying dividends to a shareholder is that they are subject to a lower tax rate at the personal level when compared with the tax rates for earned income. While the company won’t receive a deduction for dividend payments as they are paid out from earnings that have already been taxed, they can receive a credit for the taxes that they did pay on these distributions.
As a shareholder, if you intend to make payments toward the CPP, any dividend income will not count when an individual determines how much they would like to pay in. Keep in mind that dividends are paid out to all shareholders of a company based on their ownership percentage. If your intent is to pay just one shareholder, but the company has multiple shareholders, paying out dividends may not be the best option.
Shareholders may take a loan from the company. There is no taxable impact of taking out a loan, with the exception of any interest charged or if the loan is not repaid. Any interest that is paid by the shareholder to the company on the loan is considered income to the company.
In some cases, shareholders may have loaned money or paid company expenses on its behalf. Repayments received by the shareholder are not taxable income, nor are they allowed as an expense deduction.
Valley Business Centre
If you are an owner/shareholder of a company and are looking to be paid, there are many options available to you. Careful consideration of each option is necessary to determine the tax impact on both the shareholder and the company.
To ensure that your books and records are up-to-date, contact the bookkeeping professionals at the Valley Business Centre. Offering reliable and timely service, Valley Business Centre has served small-to-medium sized companies with their bookkeeping and payroll needs since 1990. We work with clients that are located in the BC area and throughout the region. For more information, contact the bookkeeping specialists at Valley Business Centre today.