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A Guide to the Business Expense Claiming Process in Canada for Employers

Every business has expenses, whether operating in the home country or abroad.  Some of those expenses are incurred directly by the business and others by employees.  Business expenses incurred by employees are typically non-taxable to the employee if they have a business purpose, and may be deductible for the employer.

However, every country has its own rules on what types of expenses are allowed, and how to document and process the amounts.  This is true in Canada where the tax agency there sets the regulations that all businesses and employees must follow.

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Claimable Business Expenses in Canada

The Canada Revenue Agency defines a deductible expense as “any reasonable or current expense you paid or will have to pay to earn business income.”  The reasonableness test applies to both the type and amount of expense.

Those expenses can include:

  • Professional and consulting fees paid
  • Business taxes and licenses
  • Office expenses
  • Insurance
  • Meals and entertainment
  • Salaries of employees
  • Travel expenses

Supporting Documentation for Business Expenses in Canada

Receipts

All claimed business expenses must be documented and supported by receipts.  Those receipts don’t need to be submitted with the annual tax return but should be retained for six years in case of an audit.

Form T2200

For expenses incurred by an employee, they must fill our Form T2200 – Declaration of Conditions of Employment.  This form will detail the type of expense, whether it was reimbursed and if it is deductible by the employee.  For example, if an employee is required to buy supplies to use in the course of their employment, and those are not reimbursed, they can be deducted.

This form is reviewed by the employer to ensure the expenses are valid and pertain to employment, and then it signed and kept on file.

Form T4

Another form required for the employer is the T4, which will list the taxable expenses paid for the employee, along with salary and other benefits.  This will be the basis to file the employee’s tax return.  Some expenses including parking, car allowances and cell phones are taxable to the employee when paid by the employer.

Client Case: Process for Employees Claiming Business Expenses in Canada

We had a client with an employee in Canada who wanted to know how the T2200 and T4 forms were processed each year.

Solution:

We let them know that the T4s are processed first, by February 28th, and the employee would get a copy by email similar to the payslip.  That will allow them to file their own tax return with all of the taxable expenses listed on the T4.  Then, the T2200 could be filled out and processed with the T4 information.

Do you need more information about Canada?

If you are new to hiring employees in Canada, you may have more questions such as:

How are expenses reimbursed to the employee if they are non-taxable and not included on the T4 form?

Does the employer decide which types of employee expenses are allowed?

If the employee is taxed on a valid expense, can the employer ‘gross up’ the amount in payroll?

We assist our clients in addressing these types of questions, as well as issues with payroll, immigration and tax withholding.  We make international employment simple.

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