For Canadian taxpayers, a tax write-off is simply any expense that you can claim to reduce your tax.
A tax write-off is usually referred to as a tax deduction or a tax credit.
Tax deductions are certain allowable expenses that you can deduct from your total income to reduce your taxable income— the amount that your marginal tax rate is applied to.
A tax credit on the other hand reduces your tax payable – the amount after your marginal tax rate has been applied on your taxable income.
A tax credit can either be non-refundable – reducing or cancels your taxes payable, or it can be refundable – paid to you even if you don’t have any taxes owing.
Personal vs. Business Use
As a taxpayer, if you have a business, you can only claim deductions on your business income to the extent that they relate to the operation of your business.
You cannot apply personal expenses to reduce your business income, however certain expenses can both be used for personal and business purposes, where you use the portion of the expense used in your business as a deduction
Calculating personal and business net income for tax purposes can only include allowable income and expenses as listed by the CRA.
If you are employed and have work related expenses you would like to deduct, ensure your employer completes Form T2200 and provides it to you.
Common Tax Write-Offs
Some common write-offs that you can use to reduce income tax on income earned from a business include:
1. Motor Vehicle Expenses
If you use your motor vehicle to earn business income, you can write off the portion of your vehicle expenses that you incurred to run the business.
Motor vehicle deductible expenses that you can write off from your business income include license and registration fees, fuel and oil costs, electricity costs for zero-emission vehicles, insurance, interest on money borrowed to buy a motor vehicle, maintenance and repairs, and leasing costs.
2. Home Office Expenses
Similar to motor vehicle expenses, you can only claim certain home office expenses that relate to your business operations.
To claim a portion of home expenses for business income earned, your home office space needs to be your principal place of business, or you need to have used the space only for business purposes.
Home expenses you can deduct include costs for heating, home insurance, electricity, and cleaning materials, portions of property taxes, mortgage interest, and capital cost allowance.
You will need to determine the portion of your home expenses that relate to your business and apply that percentage to the total housing expense to calculate how much you can write off from your business income.
You can determine the percentage of your home expense that applies to your business by dividing the business workspace by the entire area of your home.
3. Interest and Bank Charges
If you borrow money to run your business operations or purchase a property for your business, you can write off interest expenses and certain bank charges related to a business loan.
Examples of bank charges that you can claim as a business write-off include fees, penalties, or bonuses paid for a loan, loan brokerage and legal fees incurred to acquire a business property, loan guarantee or insurance fees and more.
4. Office Expenses
When you incur certain office expenses for small items such as pens, pencils, paper clips, stationery, stamps, office clips, etc.
you can deduct these expenses from your business income and consequently reduce your taxable income for the year.
You cannot claim office expenses that are considered to be capital expenses such as chairs, filing cabinets, or desks.
Other common tax write-offs include advertising expenses, delivery costs, business dues, license fees, accounting and professional fees and bad debts from customers.
Uncommon tax write-offs that many people fail to claim include allowable parts of meal and entertainment expenses, child care expenses and charitable donations.
The Canada Revenue Agency recommends that you keep all supporting records for tax write-offs that you claim for up to six years.
Even if the CRA does not request supporting documents at the time you file your income tax and benefit return, they can ask you to submit the supporting documents at any time for review.
Frequently Asked Questions
- Do you get money back for tax write-offs?
If your refundable tax credits exceed your taxable income, then you can get money back from the government. However, if your tax credit is non-refundable, the deductible amount can only reduce your taxable income to zero.
- Can you write off a car purchase?
A car purchase is usually considered to be a capital cost and cannot be written off as a business expense. However, you can write off certain business-related car expenses such as insurance and maintenance and repairs or leasing costs if it is leased.