Business expenses

Question 1

Deductibility of expenses (Taxation)

Answer 1

General limitation – To be deductible, expense or outlay must be made or incurred by the taxpayer for the purpose of gaining, producing or maintaining income, and be expected to generate income related to the taxpayer’s business or property

Reference: ITA 18(1)(a)

Question 2

Common business expenses DISALLOWED (Taxation)

Answer 2

• Amortization / Impairment / Accounting Gains & Losses (deduct via CCA)
• Personal expenses and membership / club dues
• Charitable donations – deduction to determine Taxable Income for a Corp.
• Political contributions – limited tax credit available for an individual; Federal Accountability Act deems corporate political contributions to be illegal, resulting in no deduction or credit.
• Taxes, interest and penalties related to tax
• Meals & entertainment (50% for business purposes, deductible for remote or temporary work sites, or special events for employees)
• Expenses re: issue or sale of shares and refinancing costs (deduct over 5 years)
• Life insurance premiums (except where the policy has been assigned as collateral)
• Unpaid amounts & unpaid remuneration (accrued salary which is unpaid 180 days after fiscal period is deemed not to have been incurred until actually paid)
• Carrying charges on vacant land (non-deductible portion added to ACB)
• Soft costs on construction of building (include interest, legal, accounting fees, insurance, property taxes; must be capitalized)

Reference: ITA 20(1), 18, 67.1, 78

Question 3

Common business expenses ALLOWED (Taxation)

Answer 3

• Automobile expenses
• Home office expenses
• Convention expenses (limited to 2 per year)
• Foreign taxes (deductions in excess of 15% on foreign-source property income, since foreign tax credits limited to 15%; if no foreign tax credit can be claimed, entire amount of foreign non-business income tax is deductible)
• Inventory valuation (lower of cost or market, method must be consistent, LIFO not permitted)
• Reserves – no deduction for a reserve, contingent liability or sinking fund in general, but reserve is permitted for doubtful debts, amounts not due under an installment sales contract; any reserve deducted in one year must be taken into income the next year