Starting Your Business Series - Part 3: What is a write-off? Expense write-offs explained for self-employed Canadians

If you have been diligently collecting your business receipts all year in preparation for tax season- kudos! That pile of unruly paper is about to come in handy and it might even lower your tax bill. But, before you start inputting those expenses into your bookkeeping software, you need to know a few things about write-offs. 

So what exactly is a write-off? It is a business expense that reduces your business's taxable income. Good news right? Yes!  Just know that not all expenses are created equal. Some things you buy in the name of business may not actually qualify as a write-off. This blog will cover things you need to know about business write-offs and some common pitfalls to avoid. 

Read on!

What is a write-off? 

A business write-off is an expense incurred related to the operations of your business that you can claim on your business tax return. A business write-off needs to be reasonable, and you can justify it's benefit to helping you incur income. By deducting your expenses from your business revenue, you can lower the tax you owe to the CRA. 

Every business is unique, and the types of write-offs will differ. A solopreneur running a digital business will not have the same business expenses as a solopreneur running a baked goods business. 

 So what are some common write-off categories?  

• Business startup costs that you incur while the business is in operation
• Office Expenses - like pens and paper 
• Business use of home 
• Salaries, wages, benefits paid to employees
• Business software (subscriptions for web- hosting, design, etc.)
• Marketing costs
• Telephone and utilities
• Rent (if for business use)
• Subcontractors
• Vehicle (if used for business)
• Course/ training fees for development related to your business 

As a solopreneur, it’s sometimes hard to distinguish between what CRA might consider eligible and ineligible as it pertains to your business expenses. The world of personal and business often blurs together and the word on the street tends to be pretty loose. So it might seem like buying decor for your home office sounds like a legitimate business expense since it is in fact, the space you do business in, but the CRA won’t accept it. Same thing for most clothes and memberships to most recreation clubs - even if you feel you are getting them for business purposes.  

These are just a couple of examples where we’ve witnessed a misunderstanding when it comes to write-offs.  And there’s no shame if you’re reading this and feeling a lump in your throat because you may have made a write-off mistake in the past.  We’re here to set you on a path to greater clarity around this complex topic. For a deeper dive on all things write-offs check out our upcoming course Solopreneur Tax Academy

What’s the difference between capital expenses and operating expenses?

If you are starting a new business, you are likely to have startup costs associated with getting it off the ground. Again, these will vary widely depending on what type of business you are in. You might, for example, need pricier things like computer equipment or maybe even to make modifications to a leased office space. Some of these initial expenditures may require different accounting treatment, in that they will be considered a capital asset, rather than a business expense.

What does this mean exactly?  Capital assets are purchases made for your business that have a usefull life of more than one year.  Because of this, the CRA requires capital assets to be depreciated over their useful life according to the asset class that the CRA deems for them.  For more information on this see common capital asset classes and their associated depreciation rates HERE.

What this all means is that  they don’t impact your total tax bill in the year they are purchased the same way an eligible expense you can write-off in the same year would.   

As a rule of thumb, anything with a useful life greater than one year is considered a capital asset. The CRA provides more detailed guidance on this HERE.  This means that you cannot write off the expense entirely the year you purchased it. Instead, you have to write them off over time, or in fancy accounting language - depreciate the asset over time, and that yearly depreciation then becomes an annual expense recorded on your profit and loss statement. How long and at what percentage the asset is depreciated will depend on the asset category.

For example, let’s consider a typical capital expense that you will likely have at some point in your business journey - a laptop. A laptop is a class 50 capital asset by the CRA. What does that mean? The CRA will allow you to write off 55% per year of the declining balance on this asset using the capital cost allowance rules. 

It’s also important to note that the laptop (or any asset) must be “in use”, so actively being used by the business as of the year end date in order to qualify for Capital Cost Allowance in that year.

When making the decision to purchase items for your business it is important to consider whether they are capital assets or not, especially if you are purchasing them with  the anticipation of the tax benefit of a write-off. 

How do I stay on top of my business expenses? 

Let’s talk about receipts. Receipts prove that you have made the purchase you are claiming on your return. You are obliged to keep receipts for six years from the end of the tax year they relate to. If you filed late, the six-year clock starts ticking when you file (not when your taxes were actually due). So, a solid receipt storage and organization strategy for your business is critical for your business and will do wonders for your mindset if you keep this area of your business organized.

There are many ways you can keep your receipts. You can store them physically in boxes, envelopes, etc., or you can use an app to capture them and store them in the cloud. It doesn’t matter how you do it; the important thing is that you do it. It’s a relief to know that you can access them if needed - one more thing off your mind. 

Apps we love for receipt storage are Dext and Hubdoc.  These will cost you a monthly subscription though. If you want to bootstrap it, Google Drive (or whatever cloud storage system you use) is also a great place to store receipts.  Just make sure they are backed up and in a common digital format (ie. .png, .pdf or .jpeg). 

Six years may sound like a long time, but there are some documents that we recommend you keep even longer. Keeping them as long as your business is in operation is good practice. These include insurance records, capital asset purchases, and legal & business registration documents.   Create a “Permanent” file to house these important documents - ideally electronically in a secure and backed up location.

Note: Bank statements should be kept, but they don’t cut it in replace of the purchase receipt. We know that it may seem like the transaction was recorded on your credit card bill, but the CRA does not accept bank statements as proof of purchase. You need to back up each purchase with a receipt. Part of the reason is that they are not detailed. For example, they don’t show how much HST/ GST was paid for the item.

The Bottom Line

Claiming legitimate business expenses can make a huge difference in the amount of tax you pay. Even small expenses can add up over the year. That’s why getting a handle on your business expenses and understanding your write-offs is so important. The key is making this a habit. Having a receipt storage system that is easy to keep organized and accessible, and making sure you are writing off the right things puts you ahead of the game.

 Learn more about write-offs inside Solopreneur Tax Academy, where we go in-depth on:

• Common write-offs explained in detail
• Write-offs you may not have known you were eligible for and how to record them
• How to successfully claim write-offs through proper reporting
• Write-off traps to avoid
• And more!

You will not only learn the ins-and-outs of recording your write-offs, but also be provided with a customizable CPA designed template to keep you organized and prepared all year long.

This is just one part of the tax goodness that's inside Solopreneur Tax Academy -  A 6 week program helping self-employed Canadians get rid of tax season anxiety once and for all.  Join us to get the tools and knowledge you need to feel organized and prepared, and truly set-up your business up for tax season success.

Interested in learning more from us?   Follow along with us through our social media accounts (find us on Instagram @growcpa) and sign up for our newsletter for more educational and fun financial content. 

Wishing you success in your business,

 - Martina + Ashli

Date published: October 3, 2022

Disclaimer - The information provided in this blog is general in nature and solely for educational purposes. Readers use and implementation of the information comes at their own risk and is their own responsibility.