1. Deductions from business income
There are four provisions that relate to business income deductions:
(i) paragraph 18(1)(a) ­ general limitation
(ii) section 67 & others ­ general limits on deductions
(iii) section 18 ­ prohibited deductions
(iv) section 20 ­ allowable deductions
18(1)(a) ­ general limitation
This paragraph states that, in order to be deductible, an expense or outlay must be made:
(i) for the purpose of earning income, and
(ii) with a reasonable expectation of profit
The first condition is intended to eliminate the deduction of personal and living expenses. There is also
a specific paragraph discussed below that specifically denies the deduction of personal expenses. The
second condition indicates that an expenditure does not need to generate a profit to be deductible, as
long as there was an expectation of profit when it was made.
This general limitation is of greater interest to tax lawyers than tax accountants. It is unlikely that you
will be required to apply this in your undergraduate tax course.
Section 67 & others ­ general limits to deductions
For a discussion for these limits, refer to the article General limits on deductions.
Interplay of sections 67, 18, and 20
In determining whether an expenses is eligible to be deducted against business income, it is best to
apply section 67 first. This is because section 67 supersedes all other sections (i.e. if section 67 denies
a deduction, sections 18 and 20 are not applicable). If the deduction is not denied, section 18 is applied
followed by section 20. This is because the deductions denied by section 18 can be over­turned by
section 20.
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2. Section 18
Subsection 18(1) denies the following deductions:
Paragraph Description Comments
(b) Expenditures of a capital ­ includes depreciation and interest paid/payable on funds
nature use to finance capital expenditures
(c) Expenditures to produce ­ gambling profits and windfalls (i.e. lottery winnings) are
exempt income not taxable and so, related expenses are not deductible
­ income from criminal activity is taxable but expenditures
are not deductible
(e) Reserves ­ prohibited unless there exists a legally enforceable claim
against taxpayer with a reasonable expectation of payment
(f) Payments on discounted ­ where bond is issued for less than face value, repayment of
bonds discount is not deductible
(g) Payments on income bonds ­ considered dividends
(h) Personal & living expenses ­ includes premiums for life insurance, expenses for
property maintained for beneficiary of an estate or a person
connected by blood, marriage or adoption
(l) Club dues ­ dues related to a club or recreational facility are denied
­ also denied are expenses incurred for the use or
maintenance of a yacht, camp, lodge or golf course
(n) Political & charitable ­ individuasl can claim these expenses as tax credits, while
donations corporations receives a tax credit and a Division C
deduction
(p) Expenses of a personal ­ deductions are limited to those available to an employee
services business
(r) Automobile allowances in ­ allowances paid to employees are limited to $0.52 on first
excess of limit 5,000 kms and $0.46 thereafter, unless employee includes
allowance in income
(t) Payments under the Act ­ income taxes, interest and penalties are not deductible
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3. Other subsections in section 18 include:
18(2) ­ Carrying charges on vacant land
­ carrying charges on vacant land include interest and property taxes
­ carrying charges on vacant land deducted in the year are limited to the taxpayer's net income from the
land and the excess is added to the cost of the land if it is capital property
­ this limitation applies only to land held, but not used, in the course of business or to land held
primarily for resale or developer
­ this limitation does not apply to income­producing land or land owned by a corporation whose
principal business is leasing real property1
­ the intent of this provision is to discourage speculation in real estate
18(3.1) ­ Soft costs relating to construction of buildings or ownership of lands
­ soft costs include interest, legal fees, accounting and mortgage fees, insurance and property taxes
incurred during a period of construction or renovation
­ soft costs are only deductible against income earned by the taxpayer on the building being renovated
or constructed, otherwise, soft costs are not deductible and are added to the capital cost of property,
­ soft costs can be deducted once construction or renovation is complete
­ costs to acquire financing such as underwriter's fees are amortized over a five year period
18(12) ­ Work space in home
­ the costs of maintaining a work space in an individual's home is prohibited unless the work space is:
(i) the individual's principal place of business, or
(ii) used on a regular and continuous basis to meet clients, customers or patients
­ the deduction of home office expenses is limited to the income for the year from the business which
the home office is used
­ expenses not deducted in the year can be carried forward indefinitely and applied to income from the
business which the home office is used in the future
­ this provision parallels subsection 8(13) that restricts the deduction of home office expenses by an
employee
1 A corporation whose principal business is leasing real property can deduct carrying charges in excess of net income, but
cannot deduct in excess of their base­line deduction, which is interest at the prescribed rate computed on a $1 mil loan
held throughout the year.
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4. Section 20
Notwithstanding Section 18, subsection 20(1) allows the following deductions:
Paragraph Description Comments
(a) Capital cost of property ­ taxpayer may claim CCA as determined by regulation
(b) Eligible capital property ­ taxpayer may claim CEC as determined by regulation
(c) Interest ­ includes amounts paid/payable on funds borrowed to earn
business income or finance capital expenditures
(e) Expenses of issuing ­ e.g. filing, accounting or legal fees, printing, advertising
shares/debt ­ amortized over 5 years
(e.2) Life insurance used as ­ premiums are deductible provided interest payable on the
collateral for a loan loan is deductible and lender's principal business is making/
buying loans
(f) Discount on debt ­ discount is fully deductible if debt issued for at least 97%
of par value or effective interest rate does not exceed ⁴/₃ of
the coupon rate
­ otherwise, discount is ½ deductible
­ deduction taken at earlier of maturity or redemption
(l) Reserve for doubtful debts ­ must be brought back into income in subsequent year
(m) Reserve for goods not ­ must be brought back into income in subsequent year
delivered or services not
rendered
(m.1) Reserve for manufacturer's ­ must be brought back into income in subsequent year
warranty
(q) Employer contributions to ­ contributions to a defined benefit plan are deductible if
registered pension plan considered actuarially necessary
­ contributions to a defined contribution plan are deductible
provided the total of employer & employee contributions
does not exceed lesser of (i) 18% of employee's
compensation and (ii) the money purchase limit (i.e.
$20,000 for 2009)
­ contributions in excess of limit can result in revocation of
plan meaning all amounts are taxable
­ contributions made not more than 120 days after year­end
can be deducted in previous year
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5. Paragraph Description Comments
(z) Cancellation of lease ­ amount paid by lessor to lessee for cancellation of lease is
amortized over remaining lease term and renewal periods
not to exceed 40 years
(aa) Landscaping of grounds ­ otherwise considered a capital expenditure
(cc) Expenses of representation ­ incurred to obtain a license, permit, franchise or trademark
(ee) Utility services connection ­ otherwise considered a capital expenditure
There are three other deductions to discuss:
Subsection 20(10) ­ Convention expenses
­ taxpayer is able to claim cost of attending up to two conventions per year
­ convention must be related to taxpayer's business and be within its territorial scope
­ otherwise considered a capital expenditure
Deductibility of provincial capital and payroll taxes
­ provincial health levies, payroll taxes and capital taxes are deductible, but this is subject to change
Scientific Research & Experimental Development
­ see attached article
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