Tricky Business Expenses:  Don’t Fall into These Tax Traps

The June 16 tax filing deadline for self-employed proprietors is just around the corner.  Be sure to do a thorough review of business expenses allowable – it’s essential to be accurate for tax purposes and keep all receipts and documentation for audit purposes. Misinterpretation or misclassification of expenses can result in either an understatement or overstatement—both of which can impact income reporting, Canada Pension Plan (CPP) contributions, and income tax obligations.

The Backdrop.  Before completing the T2125 – Statement of Business or Professional Activities, it’s important to check for the reasonableness and correct treatment of reported expenses. This article focuses on two key categories: advertising and meals and entertainment.

Advertising Expenses.  Advertising expenses may include costs such as:

• Ads in Canadian newspapers
• Advertisements on Canadian television and radio stations
• Finder’s fees

Advertising expenses are generally deductible if the ad is directed at a Canadian audience and if 80% or more of the publication's total non-advertising content consists of original editorial content. If the editorial content is below this threshold, only 50% of the advertising expense can be deducted.

Expenses for advertising directed mainly at a Canadian market cannot be deducted when advertised with a foreign broadcaster or a foreign media company. Social media advertising  expenses, an offshoot of digital marketing is scrutinized by CRA and  may be disallowed  if they do not see the correlation between revenue gained and the expenses paid,  especially if the expenses are paid to non-arm’s length parties.

There are currently no specific provisions of the Income Tax Act that restrict the deductibility of expenses incurred for foreign online or website advertising that is primarily directed at the Canadian market.

Note: Donations and political contributions should be allocated as tax credits and not advertising expenses.  

Meals & Entertainment.  Meals and entertainment expenses are often mistakenly categorized as promotional costs. It’s important to distinguish the two, as advertising and promotional expenses are 100% deductible, while meals and entertainment are subject to a 50% limit on the lesser of:

•     the amount incurred; and

•     an amount that is reasonable in the circumstances.

Self-employed taxpayers and employed commissioned salespersons may deduct reasonable amounts for the cost of food or beverages for human consumption including any related expenses such as taxes and tips as well as the cost of restaurant gift certificates.

There are some meals and entertainment expenses that are fully deductible.  Examples include those businesses involved in the hospitality industry,  employers providing cafeterias, fund raising events, six special events such as a holiday party or picnic for the benefit of all employees, and entertainment expenses invoiced to clients and reimbursed  do not have the 50% restriction. 

Non-Deductible and Special Cases.  Certain recreational expenses—such as golf club memberships, green fees, and gym memberships—are not deductible for tax purposes.  Some industries and occupations have specific rules. For example:

• Long-haul truck drivers can deduct 80% of food and beverage expenses incurred during eligible travel periods.

• Self-employed foot or bicycle couriers and rickshaw drivers may deduct the cost of additional food and beverages needed during an average eight-hour workday. A flat rate of $23 per day may be claimed.

All the above expenses should be reviewed, checked for reasonableness and accuracy to avoid raising any red flags with CRA that could trigger audits.  Supporting documentation and receipts should always be recorded and maintained for a period of six years from the end of the last tax year they relate to.  

(why are some of these bolds so wonky?)

Advance Your Expertise in Tax and Advisory Services: Understanding the correct treatment of expenses is just one part of offering high-value financial guidance. If you're ready to deepen your expertise and stand out in a competitive field, consider earning Distinguished Master Advisor (DMA™) Specialized Credential with Knowledge Bureau. Choose from 4 Professional Vocations, and save 40% on full program registration only until June 15!