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What is a legal business expense?

A woman working in an office sitting at her desk typing on a computer. REUTERS/Catherine Benson CRB

If you’re a small business owner or self-employed you’ve likely had anxiety over the taxman contacting you about your business expenses.

The trial for suspended senator Mike Duffy, who is charged with 31 counts of fraud, breach of trust, and bribery over business expenses he claimed, has thrust this issue more into the public eye.

So what is an appropriate expense and where can things go wrong?

In its simplest form, a business expense is a cost incurred for the sole purpose of earning business income. These include the following:

  • accounting and legal fees;
  • expenses of advertising;
  • fees and licenses necessary for business;
  • employee salaries;
  • ·office supplies;
  • business telephone expenses;
  • interest and bank charges; and
  • up to 50 per cent of meals and entertainment that you pay for the purpose of earning business income.

If you run a business out of your home, then you can usually deduct partial expenses for:

  • rent;
  • mortgage payments;
  • insurance;
  • electricity; and
  • cleaning supplies.

All expenses must be backed up with an invoice or receipt.

What are not considered business expenses? Here are some examples:

Illegal payments: you cannot claim any payments that are considered illegal. This includes payments made for the purpose of doing anything that is an offence under s. 3 of the Corruption of Foreign Public Officials Act or under the Criminal Code. For example, paying a bribe or hiring a hitman is not an expense that can be claimed.

Fines and penalties: fines and penalties cannot be deducted as business expenses. So you can’t claim your speeding tickets as an expense just because you were late to a business meeting.

Personal or living expenses: these expenses cannot be claimed. It might be difficult to divide these if you conduct business from your home, so be prepared to backup any claim that you make.

Capital expenditures: these expenses must be spread out over time. You cannot claim the entire cost of buildings, furniture, equipment or vehicles all in the same year. Instead, the cost is spread out according to the Capital Cost Allowance system.

Recreational facilities and club fees: these fees cannot be claimed as a business expense. So you are going to have to hand over the money yourself for your green fees.

Meals and entertainment: only up to 50 per cent of meals and entertainment can be claimed as a business expense. So next time, you might want to order the soup instead of the lobster.

Personal services business costs: if you own a corporation and can be considered an employee of that business, then you may be denied most deductions.

These are just some examples of expenses that cannot be claimed. Make sure to research before filing your taxes, and consult a tax expert if you have any questions.

You can find more information about reporting your business expenses on the Canada Revenue Agency website.

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