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Last updated: Jan. 16, 2019
Taking Advantage of Home-Based Income Tax Deductions
Whether you’re self-employed and operate a home-based business or work for someone else, you have to pay taxes.
On the front end, federal and provincial taxes get deducted from your pay. You also end up paying taxes on day-to-day purchases, like food, household expenses, rent, utilities, gas, etc.
One of the benefits of being self-employed or operating a home-based business is that you can take advantage of a large number of tax deductions that can reduce your overall tax bill.
Understanding the benefits of being self-employed can greatly reduce how much you pay in taxes, thereby increasing your after-tax income.
A large number of Canadians are self-employed and/or operate home-based businesses. By definition, a home-based business is any business that is primarily operated out of the property they live in.
The percentage of Canadians who work from home currently stands at around 7.5%. At the same time, you don’t need to work at home to operate a home-based business.
There are a large number of professions where someone who is self-employed works outside of the home or change where they work frequently. This can include truck drivers, salespersons, independent contractors, and construction crews.
Farm operators are one of the largest segment of the Canadian population that operates a home-based business.
The Benefits of Home Businesses
Many self-employed Canadians, including those who operate businesses online, are ideally suited for home-based businesses. Every year, more and more Canadians realize how beneficial it is to work from home.
Lower Overhead
Operating a home-based business translates into lower overhead.
With a home-based business you’re not paying rent or buying space to operate the business. This is a major overhead expense.
Moreover, because you are not operating and maintaining a separate space, you will save on expenses associated with having an office, including utilities and taxes.
Income Tax Advantages
One of the benefits of operating a home-based business is being able to take advantage of unique tax deductions that allow you to reduce the amount of taxes you have to pay. It’s better to have that extra money in your pocket than with the Canada Revenue Agency.
Flexibility
A home-based business provides you with much more flexibility. This can include the hours you work, juggling child care, and spending more time with family and friends.
When your children are old enough, you can even employ them; that in and of itself comes with a number of great tax advantages.
Home-Based Business Tax Deductions
If you operate a home-based business in Canada or are self-employed, you can save money by claiming the following tax deductions.
Home-Office Expenses
You can claim any reasonable expense related to the cost of running your home-based business. This can include:
- Rent
- Advertising
- Cellphone
- Internet
- Office supplies
- Startup costs
- Maintenance and repairs
- Vehicle and travel expenses
- Meals
Not all tax deductions are treated equally though.
When it comes to rent, the amount you can deduct is based on how much space your home office occupies. And that space has to be used exclusively for business purposes.
If you operate your home-business out of a spare bedroom and it accounts for 20% of the overall square footage, you can write off 20% of your rent or mortgage payments.
There are limits though. If you operate your business out of the kitchen, and it takes up 50% of your home, you cannot claim that since it is used for reasons other than your home-based business.
The same goes for home Internet usage. If you use the Internet 30% of the time for work, you can claim 30% of that bill.
In other cases, tax deductions on depreciable assets (computers, office equipment, machinery, heavy equipment, etc.) are spread out over a number of years.
Repairs & Maintenance
A large number of repairs, home improvement, and maintenance bills are tax deductible. You can deduct the cost of labour and materials for minor repairs or maintenance done on the property you use for your home-based business.
You cannot, however, deduct the value of your own labour, capital expenses, or costs for repairs that have been reimbursed by insurance.
Home Expenses
The Canada Revenue Agency also allows you to deduct a percentage of home expenses that relate directly to operating your business. This includes office expenses (stamps, pens), cleaning supplies, utilities, snow-removal, home security, etc.
There are also “home” expenses self-employed Canadians of no-fixed address can use. For example, if you’re a long-haul trucker, you can claim cleaning supplies, clothing, in-cab living expenses, electronics, tools, toll charges, etc.
Transportation Expenses
As an entrepreneur, chances are good you’ll be required to travel for your home-based business.
For tax purposes, you can deduct transportation expenses related to business travel. If you’re going to and from a meeting, record the odometer.
Also, make sure to keep track of all relevant receipts. You do not need to submit receipts when you do your taxes but if the CRA asks for proof, you’ll need to have it. Without proof of an expense, you won’t be able to claim it.
Meals, Entertainment & Travel Expenses
Self-employed entrepreneurs can claim meals and entertainment expenses related to their business. For business expenses, like lunch or entertainment (tickets to a concert or sporting event), the CRA allows you to claim up to 50% of the costs.
If you take a business trip, and it includes a personal element, you can only claim the costs related to the business portion of the trip.
Unfortunately, the CRA rules for meal deductions is not uniform for all home-based businesses.
There are different deduction rates if you’re a long-haul trucker too. Even here, it’s not straightforward. There are two different ways long-haul truckers can claim their meal expenses, the detailed and simplified method.
- Detailed is straight forward, you can deduct up to 80% of your meal receipts.
- With the simplified method you just need to calculate the number of meals you purchase each day. You’re allowed to claim up to $51 per day, or $17 for three meals. There is no need to keep receipts if you’re using the simplified method.
FBC – Helping Home-Based Business Operators Maximize Their Deductions
If you operate a home-based business, which also includes farm operators, long-haul truckers, and other entrepreneurs that conduct work outside of the home, the tax professionals at FBC can show you how to maximize your deductions and minimize your tax burden.
Since 1952, FBC has worked exclusively with small business owners, farm operators, independent contractors, and entrepreneurs. Over the years, we have provided our clients tax services uniquely tailored to their business needs.
For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.
