Following are the two basic methods of accounting used to determine the income from a business:

Accrual Method

As a general rule, the accrual method of accounting is used to calculate income from the business. Under the accrual method of accounting, income is computed for the period during which it is earned regardless of whether the payment for the goods or services are received or not. Similarly, expenses incurred for the period are deducted in arriving at the net income from business regardless of whether the expenses are paid or not.

Cash Method

Under the cash method of accounting, income is computed based on the receipt and expenses are computed based on the payment.

After computing net income for tax purposes, various deductions from net income are allowed under the Income Tax Act. As a general rule, any reasonable expenses incurred to earn or produce income is deductible subject to certain restrictions or limitations. Some expenditures are not deductible for tax purposes, and some are capitalized, and amortized (written-off) over time. Typically, current expenditures incurred to earn income during the year are deductible; whereas, capital expenditure incurred to earn income are deductible over time.

Exceptions

• Lease payments are deductible for tax purposes as long as it is incurred to earn income regardless of whether the lease is capital (finance) lease or operating lease under the GAAP.
• Reserves for warranties are not deductible for tax purposes. However, the actual cost incurred to honour the warranties is deductible.
• Reserve for doubtful accounts – only reasonable amount may be deducted as a reserve for doubtful accounts.
• Travelling expenses are allowed to be deducted for tax purposes, but only 50% of meal expenses are allowed to be deducted.
• Club Membership fees are not deductible for tax purposes; however, 50% of the cost of meals are allowed for tax purposes.

Property income is typically earned from owning the asset (i.e., tangible or non-tangible). Typically property income includes rental income, interests, and dividends. You may deduct following expenses from the property income:

• Interest
• Accounting and tax return preparation fees
• Investment counsel fees
• Maintenance Fees
• Municipal taxes, etc

Business Meals and Entertainment Expenses

Meals and entertainment expenses are only 50% deductible at the time of computing net income for tax purposes.

Conference Meals

If at any conference, convention, seminar, etc., food, beverages or entertainment is provided to the participants. In that case, the total amount paid for the conference is segregated for conference fees, and meals and entertainment, so that 50% of the meals and entertainment expenses to be added back to income. When the segregation is not possible for meals and entertainment, then it is deemed that $50 per day is related to meal cost and seminar fees are reduced by $50 per day.

Long-Haul Truck Drivers

Any expenses incurred for the consumption of food or beverages by a self-employed long-haul truck driver during an “eligible travel period” is 80% deductible.

Convention Expenses

If you are a member of a professional organization then, expenditures incurred for attending two conventions per year are deductible. If meals are included in the cost of a convention, then it is deemed that $50 per day is spent on meals and entertainment; hence only 50% of the meals and entertainment expenses will be deductible.

Expenses for Attending Courses

• Training expenses incurred to acquire new skills is a capital expense; hence not allowed for tax purpose. As per CRA, it is to be capitalized and depreciated.
• Training expenses incurred to maintain, update or upgrade an existing skill is considered reasonable business expenses; hence allowed for tax purposes.

Training to Employees

Any training expenses incurred to train an employee, who train to other employees are deductible. But if the training is solely for the benefit of an employee, then it is considered taxable benefit for the employee and must be included in his/her T4.

Club Dues and Fees

Membership fees and club dues are not deductible. But any expenses incurred for meals and entertainment at the club is deductible if it has a business purpose subject to the limitation of meals and entertainment, i.e., 50%).

Interest or Penalties

Any interest or penalties paid for unpaid taxes or the delay in payment of taxes including installments are not deductible.

Safety Deposit Box

Safety deposit box rental fees are not deductible on or after March 21, 2013.

Depending on its size and type of investments, a company may be legally required to get an investment tax credit from the Canada Revenue Agency (CRA) which reduces the overall taxable amount payable to CRA.