In his days as a lawyer traveling the Eighth Judicial Circuit, Abraham Lincoln once asked an adversary in court, “How many legs does a sheep have?” The man replied, “Four, of course.” Lincoln went on to ask “And if you were to call a tail a leg, how many legs then?” The man replied, “Well I suppose then you’d have to say five.”
Lincoln smiled and responded, “No. The answer is still four. Calling a tail a leg does not make it so.”
We are often asked by our clients what constitutes a deductible business expense? The answer the Canada Revenue Agency has provided is quite simple: A deductible business expense is any reasonable current expense (cost) you paid or will have to pay to earn business income (revenue).
Personal expenses are specifically excluded, which brings us back to President Lincoln’s parable: calling a personal expense a business expense does not make it so. The CRA has an army of auditors who exist for the sole purpose of disallowing bogus business expenses.
Commonly Audited Personal Expenses
Non business travel expense. Any trip that is predominantly taken for non-business purposes is disallowed. If a trip is for a business related conference or meeting the business portion of the trip would include only airfare and accommodations for the duration of the conference or meeting.
Shareholder / Employee medical expenses. Unless you have set up a private health service plan in your business (i.e. a formal health insurance arrangement funded by the corporation), health expenses paid for shareholders or employees aren’t deductible. The good news is that medical expenses are deductible – in the form of a tax credit – for personal tax purposes after they cross a certain threshold (the lesser of $2,479 or 3% of net income in 2022).
Non business meals. Unless a meal is for the purpose of earning business income, such as taking a client out for dinner, the cost of the meal is not deductible. This means that going for lunch by yourself is not deductible.
Expenses Deductible for Business Purposes
Now that we’ve covered some negative examples, here’s a comprehensive list of the types of expenses that are deductible for business purposes:
- Allowance on eligible capital property
- Bad debts
- Business start-up costs
- Business taxes, fees, licences, dues, memberships, and subscriptions
- Business-use-of-home expenses
- Capital cost allowance
- Current or capital expenses
- Delivery, freight, and express
- Legal, accounting, and other professional fees
- Maintenance and repairs
- Management and administration fees
- Meals and entertainment
- Motor vehicle expenses
- Office expenses
- Prepaid expenses
- Property taxes
- Salaries, wages, and benefits
- Telephone and utilities
This is a long list, and if you follow all the links, you’ll see that properly accounting for your business expenses is, at times, difficult. But not to worry, that’s our job.
In the past we’ve had clients attempt to deduct personal expenses that span the gamut from engagement rings to haircuts to family vacations for “business brainstorming.” We always advise against this behaviour. At the end of the day you have to ask yourself a simple question: Would you still try to claim this as a business expense if you knew you were going to get audited?