Can I deduct that: ‘reasonable expenses’ to earn income

A common question I receive is whether a certain expense is deductible for tax purposes on a farm.

A common mistake people make is claiming personal expenses as farm expenses. When this issue is uncovered, it generally results in all unreasonable business expenses to be denied.

On top of this, penalties can be charged, and if you farm in a corporation, the personal expenses can be added to your personal income, resulting in double taxation.

Therefore, it is important that people know what expenses are deductible to avoid unexpected and unwanted repercussions from the Canada Revenue Agency.

The CRA states that “you can deduct any reasonable current expense you paid or will have to pay to earn business income.”

When it comes to reasonability of an expense, there are some simple criteria to consider:

  • Is it an expense that will occur, primarily, in an effort to earn income?
  • Would other reasonable farm owners pay such an expense? Ask around to see if others you know have incurred similar expenses for their business.
  • Would I allow an arm’s length employee to incur this expense for my farm?

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If you can answer “yes” to all these questions, then you are on the right track to deduct the expense. However, there are some expenses that may not appear to be as farm related as others. It is important to keep clean records on these expenses to prove the business purpose to the CRA.

Some commonly audited expenses for farms that cause issues include:

  • Business travel expenses: Any trip that is predominantly taken for non-business purposes is disallowed, so be careful which travel expenses you claim. If you go into town for business reasons, be sure to document the purpose in a log book. It would be prudent to attach a copy of any business receipts to your log book related to your travel that day.
  • Business meals and entertainment: Unless your meal is for the purpose of earning business income, the cost is not deductible. So remember, stopping quickly for lunch by yourself is usually not deductible. However, if it is for business purposes, keep your receipts and document who you had lunch with and how it relates to your farm operation.

Throughout the year, keep track of your business expenses, and when the time to file your taxes comes, be sure to only claim reasonable business expenses.

One tip is to track any expenses you are unsure of and ask an accountant about them at the end of the year. This ensures you can receive professional advice and avoid any unexpected issues in the future.

Riley Honess and Steve Scott of KPMG contributed to this article.
Colin Miller is a chartered accountant and partner with  KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca

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