Section 6 – Businesses
General Business Expenses
Taxpayers in business may deduct any reasonable expense incurred to earn business income provided such deduction is not expressly prohibited by the Act and is not a capital expenditure. Repairs and major expenditures made to prolong the useful life of a property or increase the value above its initial state are normally not deductible and are included in the cost of the property. However, an expense that will recur after a certain period of time or was incurred to put a property back in its original state is generally a current operating expense. Any expense related to a property that is used in part to carry on a business and in part for personal use must be prorated based on the extent to which it is used in the business.
Entertainment expenses are expenses incurred to canvass or retain clients. They generally include all meals and beverages (whether or not these expenses are incurred for entertainment purposes) as well as tickets for the theatre or a sports event.
As a general rule, the deductibility of entertainment expenses is subject to a 50% limit. Any related incidentals, such as taxes, tips and admission fees, are subject to this limit, with the exception of transportation costs for getting to such activities, which are fully deductible. In addition, expenses related to food and beverage that are products sold by the taxpayer or included in the service provided in the normal course of his or her company’s activities are not included in this restriction.
Specific Limit – Quebec
The deductibility of entertainment expenses is also limited to between 1.25% and 2% of the taxpayer’s sales for the year.
Example: The sales of a self-employed individual amount to $135,000 for a taxation year and his/her expenses for meals with clients total $4,000. For federal purposes, the deduction for entertainment expenses is $2,000, i.e. 50% of the expenses incurred. However, for Quebec purposes, the deduction is limited to $1,687, i.e. 1.25% of sales. For sales of $40,000, the deduction would be $650.
Under certain circumstances, this limit does not apply, in particular with respect to expenses not subject to the 50% limit. A taxpayer who is a member of a partnership cannot deduct any amount for entertainment expenses other than entertainment expenses deducted in computing the income of the partnership. The limit applies at the partnership level.
Truck Drivers’ Meal Expenses
The deductible portion of meal and beverage costs incurred by long-haul truck drivers2 in connection with certain trips3 is 80%. Moreover, self-employed truck drivers may not use the simplified method (see Section V) to determine their meal expense deduction.
Use of Recreational and Sports Facilities
Expenses incurred for the use and maintenance of a golf course or facility, a hotel chalet or a pleasure boat (unless it is the taxpayer’s regular business) are not deductible. However, 50% of meals and beverages consumed at a golf club are generally deductible to the extent they are clearly identified.
Membership Fees and Dues for Recreational and Sports Clubs
Membership fees and dues paid to recreational or sports facilities are not deductible. Other entertainment expenses incurred on the premises, i.e. meals and beverages, are generally deductible and subject to the 50% rule.
When registration fees for conferences or other similar meetings include meals, beverages or entertainment but no reasonable amount is shown on the invoice for these items, an amount of $50 per day is deemed to have been paid for meals, 50% of which is deductible. The rule applies to full and partial days. Training, travel and lodging costs of participants to these events are still fully deductible.
Taxpayers may normally deduct the cost of attending a maximum of two conferences per year.
Cultural Events – Quebec
The cost of a subscription to at least three different presentations of cultural events in Quebec and the purchase of all, or substantially all (90%), of the tickets to attend a presentation of such an event are fully deductible. The events must be one of the following:
- A concert given by a symphony orchestra, a classical or a jazz ensemble concert;
- An opera;
- A dance production;
- A concert by a singer that is not held in a sports facility;
- A play;
- A variety show (e.g. a comedy or a musical comedy production);
- A museology exhibit.
In addition to being fully deductible, these expenses are not subject to the sales limit.
When participating in social activities, consider cultural events that are 100% deductible in calculating business income in Quebec.
Entertainment expenses are fully deductible if they are reimbursed by the client and are shown specifically on the invoice.
Social Events for Employees
The 50% limit does not apply if the expenses are incurred by an employer for food, beverages or entertainment provided to all of the employees, either at the employer’s place of business or in facilities rented for the purpose. Receptions for all of the employees of one or more of an employer’s business places are also fully deductible.
This exemption is limited to a maximum of six special events during a year for each place of business of the employer.
Example: The Christmas party and the annual field day for all employees are considered as two separate events. If a business has three places of business (e.g. Montréal, Québec City and Sherbrooke), each place can have six events.
2 A truck or tractor designed and used mainly to transport merchandise and whose normal gross weight is more than 11,788 kg.
3 Of a minimum of 24 hours and at least 160 kilometres away from the municipality where the driver or his/her employer’s business is located.
Taxpayers may deduct capital cost allowance on capital property used to earn business income. There are a number of complex rules that must be followed. The half-year rule, among others, applies to most classes such that only one-half of the capital cost allowance is allowed in the year in which a property is acquired. Another measure stipulates that only property that is “available for use” qualifies for the deduction.
Acquire capital property before the end of the year in order to maximize your capital cost allowance expense or consider disposing of a property before the end of the year if it will trigger a terminal loss.
Property is grouped together into classes and capital cost allowance for each class varies according to rates and specific depreciation methods. A taxpayer is never required to claim the maximum capital cost allowance and the unamortized balance of the class is always available for future years.
The most frequently used capital cost allowance rates are shown in Table C6 – Capital Cost Allowance Rates in the Schedule – Corporate Taxation and U.S. Federal Tax.
Consider limiting the capital cost allowance claimed, for example when a loss is incurred, or to allow certain credits based on income to be claimed.
Interest is deductible if it is incurred to earn income from a business. Taxpayers may also elect to capitalize interest on amounts borrowed to acquire depreciable property used in their business by adding such amounts to the cost of the property instead of claiming a deduction.
Keeping track of the specific use made of the borrowed funds (generally with separate accounts) facilitates the deductibility of interest when the borrowed funds have been used to earn business income. This makes it possible to distinguish between borrowed funds that were used for business versus personal purposes.
Fines and penalties levied by a state (federal, provincial or foreign), a public or regulatory body, a tribunal or any other person who has been given the authority by law to levy fines and penalties are not deductible. This measure is aimed in particular at fines and penalties imposed by a professional corporation or in connection with environmental regulations or public safety as well as organizations that govern a particular industry, e.g. the construction industry.
Fines and penalties under the Excise Act are deductible for federal purposes only. There is no restriction on penalties and damages paid under a private contract.
For federal purposes, professional dues are deductible. In Quebec, they are eligible for a tax credit (see Section V).
Professionals who no longer practice but are required to carry liability insurance to cover acts when they were in practice may deduct the premiums in computing their income.
Legal and accounting fees incurred for advice and assistance in preparing income tax returns and notices of objection or appeals are generally deductible. However, such expenses must be included in the cost of the property if they are incurred to acquire a capital property used in a business.
Taxpayers who have an office in their home4 may deduct certain expenses provided the office is their principal place of business or is used solely to earn business income. Expenses must be allocated on a reasonable basis, e.g. number of square feet used. Expenses include: electricity, heating, maintenance, property taxes, home insurance and mortgage interest.
A capital cost allowance is also permitted but may lead to capital gains and a recapture of capital cost allowance when the residence is sold. If the residence is rented, the expenses related to the office portion are deductible. Taxpayers may not use home office expenses to create or increase a business loss. Expenses that cannot be deducted in a year may, however, be carried forward.
Quebec imposes an additional limit, restricting the deduction for home office expenses to 50% of the amount otherwise deductible. The limit also applies to a partnership of which an individual is a member and that carries on a business in the individual’s home. Expenses such as heating and lighting the office portion, which are primarily related to the business use, are fully deductible.
4 For home office expenses of an employee, see Section V.
Expenses incurred for the use of a motor vehicle to earn business income are deductible within the limits prescribed by the Act. Expenses should be recorded in a logbook.
Entrepreneurs may keep a simplified travel logbook, based on a representative period, in order to compile their motor vehicle expenses.
For 2018, employers may deduct travel expenses paid to employees of up to $0.55 for each of the first 5,000 kilometres and $0.49 for each additional kilometre. For additional details regarding automobile expenses, see Section V.
Employers may claim a deduction for twice the cost of public transit passes paid for or reimbursed to employees for them to travel to work. The same applies for expenses incurred by employers who offer an inter-municipal public transit service to their employees, provided certain conditions are respected.
The amounts paid are not a taxable benefit for employees (see Section V).
Amounts paid by an individual for a private health insurance plan are deductible provided:5
- The taxpayer is carrying on an active business as a sole proprietor or a member of a partnership;
- The business constitutes more than 50% of his/her income for the year or his/her income from other sources is not more than $10,000; and
- All of the taxpayer’s employees who are eligible for the plan are entitled to insurance coverage that is at least equal to his/her own coverage.
If the number of eligible employees represents at least 50% of all insurable persons in the business, the deductible amount of the premium, for the individual and persons living with him/her, is limited to the amount that would be paid for an employee in an identical situation to his/her own. In any other case, the premiums are deductible up to $1,500 for the individual and persons who are 18 years of age or older and are living with him/her, and $750 if the persons are under 18 years of age. Furthermore, the premium cannot exceed the cost of equivalent coverage for an eligible employee. Contributions that are deducted from business income are not eligible for the medical expense credit.
Example: Mr. Martin is the sole proprietor of an accounting firm that has three arm’s length employees. Mr. Martin is insured for a maximum of $7,500 per year (annual premium of $2,100). Employees are offered coverage of $5,000 per year (annual premium of $1,500). The Company only pays 55% of the premiums attributable to the employees’ coverage (i.e. $825 per employee). Mr. Martin may deduct $825 with respect to his personal coverage, i.e. the cost of the coverage offered to his employees. The excess of $1,275 ($2,100 – $825) may be included in medical expenses for purposes of the medical tax credit (see Section IV).
5 There is no deduction in Quebec.
This document has been updated on August 31st, 2018 and reflects the state of the Law, including draft amendments, at that date.