At a Glance
An income tax deduction is a deduction that reduces the amount of tax that a person or a business is required to pay.
Essentially, income tax deductions are expenses incurred throughout the year that can be subtracted from an income before taxation.
However, these deductions have limits (maximums) beyond which the extra amounts cannot be used to reduce the income to be taxed.
A Simplified Example
Cole Lincoln made an income of $2,000,000 in 2019 from his law practice in BC. His accountant informed him that he had the following deductions that could help reduce taxes from his income:
Deductions
- Cleaning supplies used by a plumber
- Start-up costs such as registration costs
- Office expenses including stationary
- Salaries and wages
- Travel costs
- Utility expenses
- Insurance
- Advertising
- Rent
His taxable income (income to be taxed) will, therefore, become what remains upon deducting the above business expenses.
Importantly: Cole wasn't allowed to deduct personal expenses including:
- Travel expenses
- Meals with friends
- Rent for his Vancouver penthouse
What this means for you and your business
The CRA places certain limitations to what you can and cannot deduct in terms of the amount and nature of the expense. For example, personal expenses cannot be deducted against a business income.
To reduce your tax expense to the government, you need to know exactly what qualifies as a tax deduction and what doesn't. A great way of mastering this is by following the advice from the CRA's Liaison Office:
"The important thing is that the expenses must be incurred to earn the business income and they must be reasonable under the circumstances."
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