Tax season for entrepreneurs with their own business can look different case by case. Whether you are a sole proprietor, or have incorporated your business, you will have to file the income/losses associated with your business for tax purposes. These articles will explain how you are taxed on your income from your business, which expenses are and are not deductible for tax purposes, and go a bit in depth on more specific topics.
Accounting Income to Net Income for Tax Purposes: Common Additions and Deductions
When adjusting your accounting income to your income for tax purposes, there are certain expenses that must be added back to the income since they are not deductible for tax purposes, and there are certain expenses that will be taken out of income since they are allowed to be deducted for tax purposes. When filing taxes for a corporation, along with your T2 you will have to file a Common Schedule 1 (S1) to show these adjustments to income. If you are filing your business income under your personal tax return, you will follow the same adjustments, but you will not have to file an S1.
| Common Additions | Common Deductions |
| Income tax expense | Incorporation costs (first $3000) |
| Interest and penalties on income tax assessments | Landscaping expenditures (cash basis) |
| Depreciation and amortization | Capital Cost Allowance (CCA) |
| Recaptured CCA | Terminal Losses |
| Non-deductible reserves | |
| Tax reserves deducted in prior years | Tax reserves claimed in current tax year |
| Accounting losses on the impairment/disposition of capital assets | Accounting gains on the writeup/disposition of capital assets |
| Pension Expense | Pension funding contributions (cash basis) |
| Scientific research expenses | SR&ED deductions |
| Warranty Expense | Warranty Expenditures (cash basis) |
| Taxable Capital Gains (in excess of allowable capital losses) | Allowable business investment losses (ABILs) |
| 1 Non-deductible automobile costs | |
| 2 50% of meal and entertainment expenses | |
| Club and other recreational fees | |
| Charitable donations | |
| Political contributions | |
| Fines, penalties, and illegal payments | |
| Advertising expenses (in a non-Canadian newspaper/broadcasting) | |
| 3 Workspace in a home expense | |
| Unpaid remuneration (other than vacation pay) (is not deductible in year accrued unless paid by 180 days after business year end) |
1 Automobile costs
Despite being in a pandemic, if you happen to have an employee of yours using an automobile you have granted them, you are allowed to deduct 61 cents per kilometer for the first 5000 kilometers they drive, and 55 cents per kilometer driven after that. Keep in mind that these amounts are specifically for 2022, as these values can change year by year (the values for 2021 are 59 cents/km for the first 5000 and 53 cents for kms after that)
2 Meals and entertainment
If you incur meal and entertainment expenses for business purposes, you are allowed to deduct 50% of the amount you paid from your income for tax purposes. The other 50% will still be taxable in the year.
3 Workspace in a home expense
If you operate your business partially or entirely from your home, you are allowed to deduct expenses incurred from your income for tax purposes. They are permitted to be deductible only if the space in the home is your principal place of business or if the space is used exclusively for the purpose of earning income and used on a regular basis for meeting clients. If either of these conditions are met, you are allowed to deduct your home’s common expenses (such as property taxes, utilities, etc.) in proportion to the amount of time you use that space for business purposes.
Reserves, qualifying SR&ED expenditures, and CCA will be covered in other articles
Resources
Buckwold, William, et al. Canadian Income Taxation, 2021/2022. McGraw-Hill Education, 2021.
Wolfe, Kathy. 2022 CPA Competency Map Study Notes, 20th Edition. Densmore Consulting Services Incorporated, 2022.
