A Guide To The Business Expense Claiming Process In Canada For Employers

Every country has its own rules on what types of expenses are allowed

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.

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:

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.

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.

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.

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

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.

This article first appeared here.