What Actually Counts as a Business Expense? The Line Between Smart Tax Planning and CRA Trouble
Where's the line between smart tax planning and CRA trouble? Murtagh & Co. breaks down what actually counts as a legitimate business expense, from vehicle and home office costs to medical bills and PHSPs.
Too Cautious Costs You Taxes. Too Loose Costs You a Lot More.
Most trades business owners we work with fall into one of two camps. Either they're too cautious, leaving legitimate deductions on the table because they're not sure what qualifies, or they're too loose, running personal costs through the business because it feels like the same money anyway. Both approaches cost you. The first costs you in taxes paid unnecessarily. The second costs you a lot more if CRA ever looks closely.
What the Rule Actually Says
The good news is that the rule for what counts as a business expense isn't complicated, even if applying it takes some judgment. Under the Income Tax Act, an expense is deductible if it was incurred for the purpose of earning business income. It can't be a personal or living expense, unless you're only claiming the portion that's actually used for the business, and it has to be reasonable in amount. That's the whole test. A truck used half for job sites and half for personal errands gets a deduction for half its costs, not all of it. A phone used for both gets apportioned the same way. Where trades business owners get into trouble isn't usually the concept, it's the edge cases where the line looks blurrier than it is.
Home Office Costs: Employee Rules, Not Sole Proprietor Rules
Home office costs are a good example. If you're incorporated and you're a 100% shareholder working through your own corporation, you're generally an employee of that corporation for tax purposes, not a sole proprietor. That distinction matters because sole proprietors and employees are governed by different rules. As an employee, you can only deduct home office costs if you either work more than half your time from home for at least four consecutive weeks, or you use a dedicated space regularly and exclusively to meet clients in person. You'll also need a signed T2200 from your own corporation. Fall short of that threshold and the home office deduction isn't available to you personally at all. Some owners structure it differently instead, having the corporation pay rent to the shareholder for the office space, which is taxable rental income to you personally but comes with an offsetting deduction for your share of the home expenses. Either way, it's not a claim to make casually. It has to be structured properly and supported with real documentation.
Medical Expenses: The Most Avoidable Mistake We See
Medical expenses are where we see the most avoidable mistakes, and also the most missed opportunity. We've seen corporations pay a shareholder's dentist or physiotherapy bill straight from the business account, treating it like any other cost. It isn't. Medical expenses aren't a business expense, so the corporation doesn't get a deduction, and depending on how it's booked, either it sits as a growing balance owed back to the corporation on the shareholder loan account, with a repayment deadline attached, or worse, it gets treated as a taxable benefit added directly to the shareholder's personal income with no deduction to show for it on either side. Compare that to a Private Health Services Plan, which lets the corporation deduct the same medical costs in full, with no taxable benefit to the shareholder at all, as long as it's run through a proper licensed administrator rather than an informal arrangement. Same expense, same person paying for it. One version costs you twice. The other is a clean, fully supportable deduction.
It's Not About Loopholes. It's About Structure.
This is really the whole point of understanding what makes an expense legitimate. It isn't about finding loopholes, and it isn't about being afraid to claim what you're entitled to. It's about knowing the difference between the two, because the gap between them is often just a matter of how something is structured and documented, not what it costs.
How Murtagh & Co. Can Help.
As a former trades business owner, I've been on both sides of this. I've paid for things out of the business without thinking twice about whether they qualified, and I've also left money on the table by being overly cautious about claims I was entitled to make. Murtagh & Co. works with Okanagan trades and construction businesses to find that line for your specific situation, whether that's setting up a PHSP, structuring a home office arrangement properly, or reviewing how expenses are currently being booked. If you're not sure whether something you're already paying for could be structured as a proper deduction, that's exactly the kind of question we like to get.
Prefer to talk it through? Book a free 30-minute call at a time that works for you, or reach out at info@murtaghco.ca.