Eligible and Non-Eligible Tax Deductions for Enterprises

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.[1]

Note: The deduction of business losses under the ITA is optional, not mandatory.[2] 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.[3]

Start-Up Expenses

An established, profitable company can immediately make use of the losses associated with the start-up costs of a new business.[4] 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.[5]

Other Permitted Deductions

Additionally, other permitted deductions under the ITA include, but are not limited to, the following: Capital cost allowance on depreciable property is deductible under subsection 20(1)(a) – allows a taxpayer to deduct an amount to reflect “depreciation” of the property. Interest payments are deductible under subsection 20(1)(c)(i) if four conditions are met: amount must be paid or payable in the year; amount must be paid pursuant to a legal obligation to pay interest; borrowed money must be used for the purpose of earning income from a business or property; (emphasis added) amount must be reasonable.[6] Share transfers and other fees under subsection 20(1)(g). Moving expenses* are deductible under section 62 if such expenses fall under the definition of “eligible relocation” where the distance between the old residence and the new work location is not less than 40 km greater than the distance between the new residence and the new work location.[7]

Note: There needs to be a causal connection between the move and the “new” job. *Not limited to businesses – employees may also use deduction.

Home workspace expenses are deductible under subsection 18(12)(a) to the extent that the workspace is either the individual's principal place of business; or used exclusively for business and meeting clients, customers or patients of the individual in respect of the business.

Note: Expenses may only be deducted to the extent of the taxpayer's income from that business for the year – i.e., cannot create a loss,[8] but losses (i.e., any amounts not deductible by reason of s. 18(12)(b)) can be carried forward indefinitely.[9]

Prohibited Deductions

In computing the income of a taxpayer from a business or property no deduction shall be made in respect of: illegal payments – i.e., bribes (s. 67.5(1)); fines and penalties (s. 67.6); outlays or expenses – except to the extent they were made or incurred for the purpose of gaining or producing income (s. 18(1)(a)); payments on account of capital (“capital outlay or loss”) – i.e., while current expenditures are deductible under s. 9(1), capital expenditures are not (s. 18(1)(b)); personal living expenses – other than travel expenses incurred while away in the course of carrying on the taxpayer's business or certain moving expenses permitted under s. 62 (see above) (s. 18(1)(h)); home office expenses if they do not meet the requirements of 18(12)(a) above (s. 18(12)); use of recreational facilities and club dues (s. 18(1)(l)); limitation re: personal services business expenses (s. 18(1)(p)); and certain automobile expenses (s. 18(1)(r)).

Additional Considerations re: Canadian Controlled Private Corporations (CCPCs)

A CCPC is simply a type of private corporation controlled by residents of Canada.[10] Many businesses aim to be designated as a CCPC because of its advantages when it comes to tax reliefs, including a lower tax rate.[11] 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.[12]

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.[13]

Conclusion

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.

[1] 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.

[2] Ibid.

[3] Income Tax Act, RSC 1985, c 1, s 111(1)(a) [ITA].

[4] Supra note 1.

[5] Ibid.

[6] ITA, s 20(1)(c)(i); Shell Canada Ltd. v Canada, [1993] 3 S.C.R. 622.

[7] ITA, s 248(1)(d).

[8] ITA, s 18(12)(b).

[9] ITA, s 18(12)(c).

[10] 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>.

[11] Ibid.

[12] Supra note 1.

[13] Ibid.