Deductibility of business Expenses and

Generally any expenses incurred in order to generate business income can be deducted for tax purposes unless it is specifically prohibited in the income tax act. However there are some exceptions. For example major expenditures on and repair of property for the purpose of prolonging its useful life or increasing its value above its initial state are not deductible and should be added to the cost of the property in which case they will be deductible as CCA. In general, purchases whose useful life is over a year and cost more than $ 500 are considered assets and should be amortized according to their CCA class and rate.


So what happens if a business’ expenses exceed its revenues?

Business losses can be deducted against any other type of income and may be carried back 3 years or forward 10 years (if the loss was incurred after Dec 31, 2005). It is recommended that you use all of your non-refundable credits first before claiming your business losses in any given tax year. Also you can carry back only a portion of your current losses. By doing so you can carry back a business loss against multiple years of income that was taxed at a higher marginal rate since higher rates apply to higher incomes.

Starting a business


Starting a business is a daring and demanding endeavor and requires a lot of time and effort. Before you can turn your ideas into reality, you must assess the risks and rewards of the venture, and take into account many factors such as capital requirements, sources of funding, competitiveness of the industry in which you will be operating, and the core competencies which will set you apart from the competition. A professionally formulated business plan can assist you in identifying your business’ strengths and weaknesses, evaluating its financial viability, and securing financing. At MKG, we are accounting professionals who can turn your business ideas and crude data into a well-articulated and meaningful business plan and increase your business’ chance of success. It is worth mentioning that business plans are not just for start-ups; established and especially growing businesses use business plans in order to communicate their vision to their employees, prepare financial forecasts, raise capital, and compare their actual and planned performances.

The next steps

Once you have created a business plan and secured financing, you will need to decide the legal structure of your business. This is a complex issue and needs careful consideration as it will affect you and your business’ liabilities, and income tax consequences.
There are several ways in which one can carry out your business in Canada: as a sole proprietorship, a corporation, or a partnership. Each method has some advantages and disadvantages.
For example as a sole proprietor, you do not have to file a separate corporate tax return every year (which can be costly) and report your business income as part of your personal tax return; this allows you to claim any business losses on your personal tax return. This is an enormous opportunity for start-up businesses which are more likely to incur losses initially as it will allow the owner to reduce his or her personal taxes to the extent they incurred losses in their business. Incorporated businesses, on the other hand, cannot transfer their losses to the owners; although they may carry the losses forward to reduce their taxable income in the future. A disadvantage of sole proprietorships is that they are considered a separate legal entity and the proprietor(s) stand personally liable should their business be sued for damages or misconduct.
Incorporating your business involves some setup costs such as name searches and incorporation fees and requires a separate corporate tax return to be filed every year. An incorporated business is also subject to closer scrutiny by the provincial or federal regulatory bodies. For most profitable businesses, however, the tax savings outweigh the initial and ongoing costs of incorporation. Once incorporated, your business becomes a separate legal entity which means that you and your personal assets are protected from liabilities incurred by your business. It should be noted however, that most banks require a personal guarantee on business loans which means that should your business default on the payments, you will be personally responsible for the loan. Aside from the legal liability protection that a corporation offers, there are some other noteworthy advantages such as the Capital Gains Exemption. Assuming that you or your family members are the shareholders of an incorporated business, each shareholder is entitled to $ 800,000 Capital Gains exemption on disposal (i.e. when they sell the shares), a fantastic opportunity for those who want to retire or pass on the torch to their children. Another advantage of incorporating your business is the ability to split the income generated by your business with family members to the extent of their involvement in the business.

One of the most attractive features of an incorporated business is the ability to retain a portion of the earnings in the business. Since corporations enjoy lower tax rates and – unlike sole proprietorships and partnerships- have the option of maintaining all or a portion of their earning in the corporation, the shareholder(s) personally, pay tax only on amounts received as salary or dividends from the business. This is an enormous opportunity for those businesses whose income fluctuates from year to year or those whose income exceeds the needs of the shareholder(s).

Whether you choose to conduct your business as a sole proprietorship or corporation or if you need to assess which structure suits your needs, we are here to help. We, at MKG, can provide you with the relevant facts about your business’ financial performance to assist you in making sounds business decisions. If you choose to incorporate, we can guide you through the process, from names searches to filing the governmental paperwork and obtaining certificates.