What expenses are tax deductible in Canada?

Knowing which expenses are deductible can be of a great help for both individuals and businesses in Canada. By understanding, identifying, and documenting these expenses, taxpayers can reduce their taxable income and tax liability. In this article, we shed light on what qualifies as tax-deductible expenses, how to claim them, and the potential benefits that may be derived from them.

Why is it important to know about tax-deductible expenses?

Knowing what can be declared as tax-deductible expenses can greatly benefit employed individuals, self-employed professionals, or small business owners. This knowledge can help them optimize their financial situation and make informed financial decisions. Having more tax-deductible expenses means more disposable income, or simply put, having a bit more money for a variety of purposes.

Tax credits and tax deductions – how are they different?

These two items sound similar, but they are very different and are not interchangeable terms.

Tax deductions are the amounts deducted from total income, so the taxable income total is lower. An important implication of this is that a taxpayer can potentially be taxed at a lower income bracket. One example of tax deductions are business expenses for a small business or a self-employed professional.

As for tax credits, these are amounts that reduce the amount of income taxes you pay on your taxable income. Some tax credits are refundable, while others are not.

Their main difference is that tax credits are applied on the income tax, whereas tax deductions are applied and subtracted from taxable income as it is computed. Take note also that tax credits can come in two forms:

Refundable tax credits:

Tax credits are deemed refundable if the total of the tax credit amounts exceeds the taxes due, or if no tax is due because the deductions have reduced it to zero. When this happens, these credits can help you get a tax refund.

A good example of a refundable tax credit is the Goods and Services Tax/Harmonized Sales Tax Credit (GST/HST) credit, which is a refundable sales tax issued outside of your income tax return.

Non-refundable tax credits:

These are tax credits that can be used to reduce the income tax payable to zero. No refunds are collectable by the taxpayer based on these amounts. A prime example of a non-refundable credit is the Charitable Donation Tax Credit.

Common Examples of Tax-Deductible Expenses

When tax time comes along on April 30th of the tax year, it helps to know the sort of expenses that can be deducted from income tax. Here are some of the most common deductibles:

1. General Sales Tax/Harmonized Sales Tax Credit

GST/HST is favourable to families with kids, as this is a refundable sales tax credit exclusive to them. The intent of this tax credit is to help Canadians with low or modest income to offset any taxes they would usually pay on consumer goods and services.

This tax credit is issued quarterly, so all that taxpayers must do to receive this tax credit is to file their taxes on time, even in cases where they have no income to report. The Canada Revenue Agency even doubled the GST/HST credit last year as part of the Affordability Plan for low- to middle-income earners.

2. Charitable Tax Credit

Donating to a registered charity entitles taxpayers to use the Charitable Donation Tax Credit. How this works is that taxpayers receive 15% in federal tax benefits for the first $200 they donate, so that means they can get $30 in tax benefits. For any amount above the initial $200, taxpayers may then receive tax benefits equal to 29% of the amount donated.

Depending on the state or province a taxpayer lives in, they may receive additional provincial tax credits on their donations as well. You can look up how to compute charitable tax credits on the CRA website.

3. Home Buyers’ Amount

If taxpayers bought a qualifying home in the previous year, they could make use of this non-refundable tax credit with a maximum of $5,000. The main requirement: home buyers must be first-time buyers. This means that they have not lived in a home they or their partners owned in the past five years.

4. Work-From-Home Expenses

Even though the work-from-home setup wasn’t popular with some workers, the CRA still gave out a Work from Home Tax Credit. This measure afforded employees who had to work from home due to the pandemic a tax credit of $500 for expenses for the 2021 tax year; this was increased by $100 from the previous tax year.

This benefit allows renters or homeowners to charge some expenses on their rent or mortgage interest and other “operating expenses” if they used a portion of their home, apartment, or condo as their home office.

With this tax credit, employees could even claim more than the flat rate if they filled out the T2200 form signed by their employer. This form details any reimbursements received and what expenses may be claimed.

5. Self-Employment Expenses

These expenses apply to taxpayers who are totally self-employed or are full-time employees but operate another business on the side. Some of the more common expenses for self-employed professionals and their businesses can include:

• Advertising costs
• Bank fees
• Cellphone service payments
• Merchandise inventory
• Office supplies
• Vehicle expenses (fuel & maintenance)

Here’s a video about small business expenses that may be written off:

6. RRSP Deductions

Taxpayers can deduct the amounts they contributed to their Registered Retirement Savings Plan (RRSP). This effectively reduces their net income, reducing their taxes owed.

To make the most out of this tax deductible, it’s advised not to use up all the RRSP contributions in the same tax year. A better strategy is to only use a portion of the RRSP contributions to reduce the total tax liability for that year, reserving unused amounts for years when the income may be higher.  

If you need to use your RRSP funds in an emergency, we’ve come up with some strategies to minimize tax on RRSP withdrawals.

7. Moving Expenses

Few Canadians might know this, but if you had to relocate for work or education and the move was over 40 kilometres, moving expenses would be tax deductible. You can claim moving expenses if:

• you moved to a new home for work or to run a business at a new location
• you moved to pursue further studies and to become full-time students of a post-secondary program at a college, university, or educational institution

Deductible moving expenses include driver’s licence renewal fees, travel expenses, and utility hook-ups.

8. Medical Expenses

Healthcare in Canada remains the envy of Americans, and for good reason. Apart from the cost and the quality of healthcare services, many medical expenses can give citizens tax credits.

To maximize this claim, it’s advised for one spouse to make the claims for all the medical expenses of immediate family members and any dependents. Common medical expenses that can earn tax credits include:

• Dentures and dental implants
• Fertility expenses (Surrogacy and In vitro-related procedures and expenses)
• Home renovations for improving quality of life for the mobility-impaired
• Private medical insurance premiums
• Prescription glasses or contact lenses
• Travel expenses (if seeking treatment involved traveling over 40 km one-way)
• Tutoring expenses for children with disabilities

9. Childcare Expenses

Tax-deductible childcare expenses can include:

• Fees for day nursery schools and daycare centres
• Caregivers (part-time babysitters or full-time nannies)
• Overnight boarding schools
• Camps with lodging
• Day camps
• Sports schools

There are limits to claiming these tax-deductible expenses. In a household with two parents, only the spouse or common-law partner with the smaller income may claim these expenses. Be sure to review the eligibility requirements before including these expenses in your next tax return.

10. Canada Child Benefit

The Canada Child Benefit (CCB) is a monthly payment given to qualified families. This is designed to help with the cost of raising children, especially those under the age of 18.

This is a tax-free benefit and may come with the Child Disability Benefit (when appropriate) and any related programs provided for by the territory or state.

11. Child Disability Benefit

The Child Disability Benefit (CDB) is a monthly benefit payment given to families who care for a child under 18 who has serious or prolonged mental or physical impairment. This is completely tax-free. For families to use this benefit:

• They should be eligible for the CCB
• The child must be eligible for the disability tax credit

If a family is already receiving the CCB for the child who is likewise eligible for the Disability Tax Credit, then the CDB is automatically given as well.

12. Canada Workers Benefit

The CWB or Canada Workers Benefit is a refundable tax credit intended to provide financial assistance to working individuals and families with small incomes. To qualify, applicants must earn at least $3,000 and their net income must be below the income level requirement set by their province or territory.

The amount paid out by this benefit depends on:

• Adjusted family net income
• Earned income
• Eligibility of dependent(s)
• Eligibility for the disability tax credit
• Marital status and eligibility of spouse
• Province or territory

How to claim the benefits

This is but a sample of the many tax credits and deductible expenses for tax purposes available to Canadian taxpayers. To claim these benefits, check out the CRA website for the eligibility requirements, forms, and processes.

Tax-deductible chickens, condoms, and spiders?

In the discussion about what is tax-deductible in Canada, a few interesting topics can come up. First, back in 2018, citizens of Toronto proposed a measure that would allow them to raise hens called the UrbanHensTO pilot program. What did this have to do with tax-deductible expenses?

One Toronto man thought of raising chickens to help with his clinical depression and wondered if the veterinary bills, food, and shelter expenses for the chickens could be written off his next tax return.

Under the program, the chickens are solely for producing eggs for household consumption and cannot be for any business that sells eggs, chickens, or their manure as fertilizer.

Lisa Gittens, an expert from tax firm H&R Block, commented on this case: “While the chickens give him some comfort, they have not been specifically trained to assist him because he has a disability or impairment, so there is also no medical tax deduction. They are simply his chickens in the comfort of his own home and are not considered a taxable expense.”

Another case of H&R Block ascertaining what is tax-deductible was when the owner of an adult video production company asked if the lingerie and condoms he used may be considered tax-deductible expenses. Maybe not surprisingly, H&R Block decided that these were legitimate business expenses. In the operation of his registered business, lingerie and condoms were necessary to generate his business income.

Finally, there’s the case of a family using their moving expenses claim to get a tax deduction for their pet tarantula. This is a curious case, since the family had to list the spider as one of their household furnishings. And yes, H&R block considered this a legitimate claim.

Many Canadians are unaware of the gamut of tax-deductible expenses or expenses that can give tax refunds, posing both a challenge and an opportunity for financial advisors. They can make their services stand out and provide current and prospective clients with the tax planning strategies they didn’t know they needed. As for individual taxpayers, due diligence is necessary for filing taxes and tracking expenses because this can literally pay off.

Are there are any expenses that you didn’t know were tax-deductible or could get tax credits for? Let us know in the comments!