According to Statistics Canada, just over 2.7 Million Canadians were self-employed in 2009.  That’s almost a 100% increase over the 1.4 Million Canadians self-employed in 1981.  Self employed business people and contractors have the luxury of certain tax deductions, which their employed counterparts do not have.

So what can the self-employed deduct?

Below is a general list of deductible items, which may or may not apply to the individual in business:

  • Advertising expenses
  • Meals and entertainment @ 50%
  • Bad debts
  • Insurance premiums (not on personal residence)
  • Interest and/or bank fees
  • Business tax, fees, licenses, dues, memberships, and subscriptions
  • Office expenses
  • Supplies
  • Legal, accounting, and other professional fees
  • Management and administration fees
  • Rent (not personal residence)
  • Salaries, wages, and benefits (including employer’s contributions)
  • Property taxes (not personal residence)
  • Travel (including transportation fees, accommodations, and allowable part of meals)
  • Telephone and utilities
  • Delivery, freight, and express
  • Motor vehicle expenses (not including CCA)
  • Capital cost allowance (CCA)
  • Other expenses

In addition to these expenses, if the individual has a home office, he/she can deduct a portion of his/her home expenses.  These may include:

  • Heat
  • Electricity
  • Insurance
  • Maintenance costs
  • Mortgage interest
  • Property taxes

To figure out the business use of home, either divide the number of rooms used for business by the total number of rooms in the home or you can divide the square footage of business space by the total square footage in the home.

So, with all these possible tax deductions, it’s no wonder why there has been such a substantial increase in the number of self-employed individuals.

Don’t get carried away.  As a sole practitioner, I’ve seen numerous clients provide me with every receipt for every purchase in the entire year.  No! Groceries purchased for personal consumption are not tax deductible.

Keep the above list as a handy reference to help you categorize your expenses throughout the year.  Do yourself a favor and purchase some file folders and label them accordingly.  As the expenses are incurred, you will be able to place it in the proper category.  This will relieve a lot of headaches and stress come tax time.  It will also help in case of a Government audit.  Auditors feel much more comfortable when all your expenses are neatly organized.

If you do have any further questions about some deductible items, it would be best to consult your Accountant.   Accountants keep up to date with the latest tax laws.  They will also be able to help guide you on your deductible expenses to ensure that they are reasonable and will not raise any audit flags with the Canada Revenue Agency.

This is a guest post by Allan, he will be providing us with a few tax related articles of the next few weeks. Allan is a CGA residing in Montreal and works at Better Tax Services.  Each year he prepares hundreds of Personal Tax files and serves individuals across Canada.  To learn more, check out the website or follow Allan on Twitter.