1. What business expenses
can a Canadian business claim on income tax?
The CRA says business expenses are "certain costs that
are reasonable for a particular type of business, and
that are incurred for the purposes of earning income.
Business expenses can be deducted for tax purposes.
Personal, living, or other expenses not related to the
business cannot be deducted for tax purposes."
2. Are there specific tax
deductions for home-based businesses?
If you operate a home-based business, you may qualify
for the business-use-of-home tax deduction, which is
calculated by determining how much of your home you
actually use for your home-based business.
You can also deduct a portion of all your house expenses
that directly relate to operating your home-based
business as a tax deduction, such as your utilities,
telephone, ISP fees and cleaning materials. If you own
your home, you can claim a portion of your house
insurance, property taxes, and mortgage interest
(although you can't claim the mortgage payments
themselves.) If you are running your home-based business
out of a residence that you rent, you can claim a
portion of the rent you pay.
3. My business made no money
this year. Can I still claim business expenses?
Maybe. If you are filing your income tax as a sole
proprietor or partner, using the T1 form, when you are
filling out Form T2125 (Statement of Business or
Professional Activities), you will be listing various
business expenses. If your business expenses exceed your
business income, you will record a business loss on this
form.
However, note that non-capital losses can be used to
offset other personal income in any given tax year, and
can be carried back three years, or carried forward for
up to seven years. So you may not want to "claim your
business expenses" and use your business loss this
particular tax year. It may make more sense for you to
carry your non-capital loss back to recover income tax
you've already paid, or to carry it forward to offset a
potentially larger tax bill in the future.
4. How long do I have to
keep my business records?
For tax purposes, you need to keep your business records
for six years.
Actually, the Canada Revenue Agency states that "if you
file your return on time, keep your records for a
minimum of six years after
the end of the taxation year to which they relate".
The CRA also cautions that if you have filed a tax
objection or appeal, you should keep your records until
the issue is settled, and until the time limit for
filing any further appeal has expired (which may mean
keeping records for a particular fiscal year longer than
six years).
Note that if you want to destroy your business records
before the six year minimum period is over, you need to
get written permission from the director of your tax
services office. The form to use for this is T137,
Request for Destruction of Books and Records.
5. How long do I have to pay
whatever income tax is due?
You have to pay any income tax balance owing by April
30th, assuming that your business's fiscal year ended on
December 31, which is the case with most businesses.
However, "if you have self-employment income, or are the
spouse or common-law partner of someone who does, you
have until June 15th to file your income tax return.
Even if you're not filing your income tax until June
15th, though, you still need to pay any income tax due
by April 30th, to avoid paying interest charges.
6. What happens if I don't
file my income tax on time?
If you file your income tax late, you will be charged
the late-filing penalty, which is 5 percent of the
balance owing and an
additional 1 percent of the balance owing for each full
month that your return is late, to a maximum of 12
months.
Note that the penalty charged for filing your income tax
late may be higher than this if you've already been
charged the late-filing penalty in any of the three
previous tax years.
If you missed the income tax filing deadline because of
circumstances beyond your control, the CRA may waive the
late-filing penalty and applicable interest. You can get
more information about this in the CRA's circular
IC92-2:
Guidelines for the Cancellation and Waiver of Interest
and Penalties.
Even if you owe more taxes than you can pay by the
income tax filing deadline, you should still file your
income tax return on time to avoid these late-filing
penalties.
7. What happens if I can't
pay the income tax that I owe?
First of all, even if you owe more taxes than you can
pay by the income tax filing deadline, you should still
file your income tax return on time to avoid late-filing
penalties.
Once the CRA has processed your income tax return,
they'll send you a Notice of Assessment. If you can't
pay income tax balance owing immediately, you should
contact a tax services office, which will help you set
up a mutually acceptable payment schedule. This page of
the CRA Web site has links to
tax services offices
throughout the country.
It's important to let the CRA know about the problem and
arrange a payment schedule as quickly as possible,
because daily compound interest is charged on any unpaid
income tax balance, starting on the annual filing
deadline and continuing until you've paid the income tax
you owe in full.
8. What is the time limit on
an income tax audit?
There is no stated time limit on the tax audit process.
You shouldn't think that just because you've filed your
income tax return and paid any taxes due that you're
done with your business taxes for that year.
The Canada Revenue Agency (CRA) says, "Your tax return
is recorded in a computer system that enables us to
select returns to be audited... In some cases, we
compare selected financial information for current and
previous years of clients engaged in similar businesses
or occupations."
So if your business is selected for a tax audit, the
audit may include records from previous years.
Realistically, though, one would assume that a tax audit
would not go back further than six fiscal years, as the
CRA requires that business records be kept for six
years.
