Written by Chiara Lasquety
JD Candidate 2023 | UCalgary Law
Taken together, the general rule articulated in sections 9(1), 67, and 18(1)(a) of the Income Tax Act (the “ITA”) is that reasonable expenses associated with operating a business may be deducted against the income generated by that business. Such costs include not only all the ordinary operations costs but also moneys paid in the discharge of liabilities normally incurred in the operations. These expenses include amounts spent on employee salaries, rent, research and development, furniture and equipment, etc.
Note: The deduction of business losses under the ITA is optional, not mandatory. Accordingly, subsection 111(1)(a) of the ITA permits a corporation (or individual businessperson) to carry losses forward for twenty (20) years or applied back three (3) years.
An established, profitable company can immediately make use of the losses associated with the start-up costs of a new business. A newly formed corporation undertaking a new business is able to deduct its start-up expenses, but because it has no income the corporation gains no immediate tax savings from the deduction.
Other Permitted Deductions
Additionally, other permitted deductions under the ITA include, but are not limited to, the following:
In computing the income of a taxpayer from a business or property no deduction shall be made in respect of:
Additional Considerations re: Canadian Controlled Private Corporations (CCPCs)
A CCPC is simply a type of private corporation controlled by residents of Canada. Many businesses aim to be designated as a CCPC because of its advantages when it comes to tax reliefs, including a lower tax rate. A common strategy for small businesses is to use just enough of a year’s expenses to reduce a CCPC’s income to $500,000 in order to benefit from the special low tax rate – saving any remaining expenses for application against income in future years.
Flow-Through Taxation for Unincorporated Businesses
For unincorporated structures, such as partnerships and limited partnerships, losses may flow-through from the partnership to their partners, who can then use those losses to reduce their personal taxes.
As opposed to the limited deductions available to employees in reducing one’s taxable income, there are various deductions available for businesses to utilize under the ITA. For further information regarding any of the foregoing, or about tax considerations in structuring your enterprise generally, please contact the BLG Business Venture Clinic.
 Bryce C. Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (Toronto: LexisNexis Canada Inc., 2018) at 38.
 Income Tax Act, RSC 1985, c 1, s 111(1)(a) [ITA].
 Supra note 1.
 ITA, s 20(1)(c)(i); Shell Canada Ltd. v Canada,  3 S.C.R. 622.
 ITA, s 248(1)(d).
 ITA, s 18(12)(b).
 ITA, s 18(12)(c).
 Diana Grey, “What are Canadian-controlled private corporations (CCPC)?” (January 2021), online: Wealthsimple <https://www.wealthsimple.com/en-ca/learn/canada-controlled-private-corporations#what_is_a_ccpc>.
 Supra note 1.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.