We are often asked by our clients what constitutes a deductible business expense? The answer the Canada Revenue Agency has provided is quite simple: a deductible business expense is any reasonable current expense (cost) you paid or will have to pay to earn business income (revenue).
Personal expenses are specifically excluded, which brings us back to President Lincoln’s parable: calling a personal expense a business expense does not make it so. The CRA has an army of auditors who exist for the sole purpose of disallowing bogus business expenses.
Commonly Audited Personal Expenses
- Non business travel expense. Any trip that is predominantly taken for non-business purposes is disallowed. If a trip is for a business related conference or meeting the business portion of the trip would include only airfare and accommodations for the duration of the conference or meeting.
- Shareholder / Employee medical expenses. Unless you have set up a private health service plan in your business (i.e. a formal health insurance arrangement funded by the corporation), health expenses paid for shareholders or employees aren’t deductible. The good news is that medical expenses are deductible – in the form of a tax credit – for personal tax purposes after they cross a certain threshold (the lesser of $2,109 or 3% of net income in 2012).
- Non business meals. Unless a meal is for the purpose of earning business income, such as taking a client out for dinner, the cost of the meal is not deductible. This means that going for lunch by yourself is not deductible.