Small businesses play a pivotal role in the Canadian economy. To encourage entrepreneurship, the CRA has implemented a bevy of tax incentives that allow small business owners to deduct a number of start-up costs as business expenses. We have listed all the frequently asked questions regarding start-up cost deduction to help you sail through this tax season. Buckle up and claim what you deserve.
What’s the start-up cost?
A start-up cost is the total amount of money you invest on your business for it to take off. Let’s say that you are starting an online chocolate business, the cost of ingredients, ads, packaging, and logistics could all add up to start-up costs. To be eligible for tax deduction, start-up costs need to be incurred in the same tax year, in which your business started, but after the business’s official start date.
How to determine the “official start date”?
The official start date isn’t the day you register your business; nor is it necessarily the same day as the start of the lease for your venue. As far as the CRA is concerned, the official start date should be the one on which you conduct significant activity in an attempt to make a profit. Take the online chocolate business again as an example. The day you purchased all the necessary kitchen equipment could be considered the official start date was given that equipment is an important step to kick off the business. In other words, the official start date isn’t a date on a document but, rather, the day on which the business owner takes initiative to make a profit.
Other examples of an official start date include but are not limited to the day:
- when the construction of a venue begins
- when the inventory is purchased
- when employees are hired
- when initial acquisition equipment, materials, or other supplies are made
- when contracts are negotiated and agreements are made
- when the business was advertised for the first time
Please be advised that any costs incurred prior to the official start date will not be considered as eligible expenses for a tax deduction.
What kind of expenses can be included in the start-up cost?
Any reasonable expenses made to initiate, maintain, and scale up the business are considered start-up costs, eligible for deductions. That said, please do not risk substituting or compounding any personal expenses to reduce your chance of an audit.
Examples of legitimate business expenses include but are not limited to: supplies, legal and professional consultation fees; motor vehicle expenses, insurance, phone and utility bills, license fees, business rents or mortgage, and property taxes, office fees, and advertising expenses.
Can I transfer personal or other properties/assets to my business?
By all means. You can transfer ownership of such personal assets as computers,· motor vehicles, or real property to your business in the first year and claim them on your taxes.
If you decide to transfer assets or properties, you need to transfer them at their Fair Market Value for tax purposes and track the fluctuations in their values.
How does Fair Market Value work?
Transferring assets to your business is fairly straightforward if your business is a sole proprietorship. The Income Tax Act dictates that assets are transferred at their Fair Market Value (FMV). This means that the CRA considers the sales of assets are at a price equal to their FMV at the time of transfer. If the FMV is significantly higher than the original value at the time of purchase, the increase needs to be reported in your income tax return as a capital gain. As for your business, it can claim the capital cost allowance on the assets at their FMV.
For a Canadian partnership or corporation, properties and assets can be transferred under an elected amount that may differ from FMV when certain conditions are met.
Starting a business can be daunting and exhilarating at the same time. Reliable advice from professionals will certainly take the edge off. Throughout the last fifteen years, Ke Wang CPA has devoted to provide our clients with peace of mind. We believe in business as mutual growth and pride ourselves for having thrived along with our clients. As our motto goes, make time for wealth, for wealth won’t make time; leave the rest to us, make time for what makes your heart sing, and leave the bureaucratic hokum to us. For more information regarding starting your own business venture, call us at: (416) 551-0555
In the interim, take care, and stay well!