Q: I’m going into business for myself and a friend told me I can “write off” all of my meals out. What exactly is a writeoff? How does it work?
A: A writeoff is an expense that a business can deduct from its gross income — it’s a casual name for tax deductions. There are a lot of common misconceptions around writeoffs. Many people think that “writing something off” means you don’t have to pay for the expense at all — but that’s not how it works.
A writeoff won’t reduce your tax bill dollar for dollar — it will reduce your income that is subject to tax, explains Jennifer Lucier, a chartered professional accountant at BDO Canada.
Lucier adds that not every expense is deductible; section 18 of Canada’s Income Tax Act sets out general limitations for writeoffs. No deduction is allowed for an expense unless it was made or incurred for the purposes of gaining or producing income from business or property.
As well, any expense claimed must be reasonable in the circumstances. In other words, it has to be a business-related expense.
“You cannot write off the entire cost of a meal; only 50 per cent is deductible for tax purposes and, again, provided it is incurred for the purposes of earning business income,” Lucier says.
For example, Lucier says, if your taxable income has a 30 per cent tax rate, a writeoff of $1,000 would reduce your tax bill by $300. Or, if you spend $150 on a lunch with a new client, you can claim $75 and if your tax rate is 30 per cent, you’d deduct about $22.50. Your tax rate gets progressively higher as your taxable income increases.
Some other common deductions for those who are self-employed include home office expenses, advertising costs, a portion of rent and business-related travel.
Remember to always get receipts for business expenses. The Canada Revenue Agency says that a receipt has to show the date of the purchase, the name and address of the seller, the name and address of the buyer, a full description of goods or services. If the purchase price is $100 or more before tax, the receipt should also include the vendor’s business number if they are a GST/HST registrant.
The Canada Revenue Agency recommends keeping a record of your daily expenses. If the receipt doesn’t describe the goods or services, write a description yourself on the receipt or in an expense journal. If the seller or provider didn’t give you a receipt, write the details of the transaction in your expense journal.
Legally, you’re required to keep records of transactions to support expense claims. You don’t need to submit these records along with your income-tax return, but you should keep them handy in case the CRA asks to see them at a later date.
Money Coach is a weekly feature that helps Canadians find helpful solutions to personal finance challenges. If you have a question, email Lora at [email protected].
