Can I write that off?

BY GREG TONER

Originally published in OVMA Focus Magazine March/April 2023

An overview of deductions and financial hygiene

I was talking to one of my favourite clients last week—let’s call her Angie. Her veterinary practice is growing and she’s getting a new car. It’s a model that she’s always wanted, and I’m happy for her!

Angie is one of my more “ambitious” clients when it comes to deciding what is and isn’t a business expense, and I knew the question was coming. She wanted to know if she could write off her new car as a business expense. The short answer is maybe.

People casually throw around the idea of writing off things. Generally, this means claiming them as a business expense to offset your income, reduce the income tax you must pay, and possibly even get a credit back for the HST that you paid on the purchase. Depending on your corporate income and marginal personal tax rate, this could equate to more than a 50 per cent savings on the after-tax cost of that expense. It’s also known as a deduction.

To be a legitimate business expense, the expense needs to be incurred in the process of attracting or earning business income. For a vet clinic, it could be:

• Rent for your office.

• Pharmaceuticals that you administer or sell.

• Insurance.

• Consumables such as gloves.

• Electricity and heat for your practice.

• Wages for your staff and locum support.

• Repairs and maintenance for your practice’s assets.

For a locum veterinarian, the list is shorter, but there are still several legitimate expenses:

• Insurance.

• College of Veterinarian of Ontario dues.

• Scrubs.

• Professional development and memberships.

• Supplies the locum provides.

• Meals with prospective clients.

• Cell phone (a reasonable proportion for business use).

There will always be some people looking to push the envelope. Here are some of my favourite overly ambitious write-off attempts:

• Deep sea fishing trip in the Gulf of Alaska.

• A horse trailer (for a small animal practice).

• Dirt bike repairs.

• A new Seadoo.

• Mercedes G63 AMG lease payments.

• Daycare for the practice owner’s children.

• Lululemon shopping spree for the practice owner.

I generally advise clients like Angie to not take unreasonable risks. There’s no real defense if a Canadian Revenue Agency auditor asks you about that Seadoo you bought for “business purposes.” It’s better to remember all the legitimate deductions and make sure that you track them properly, rather than trying to squeeze in a few extra illegitimate ones.

Here are two expenses that are frequently forgotten that I’d like to highlight—make sure that you’re claiming them on your tax return if they apply to you:

1.  MILEAGE EXPENSE

If you’re not a large animal veterinarian, or working in a mobile practice, you probably aren’t spending a significant amount of time travelling for your practice, but there’s likely still a component of your monthly driving that relates to running your practice.

Driving from your home to your practice location is considered a personal trip, but any travel from your practice to the bank, to the store to pick up supplies or to a restaurant to pick up lunch for your staff is considered a business expense.

While you probably don’t have a business vehicle, you can still capture this expense. Each year, Industry Canada sets a mileage rate for reimbursement, and you can reimburse yourself for the business use of your personal vehicle at this rate. For travel in 2022, the rate is 61 cents per kilometre for the first 5,000 km and 55 cents for additional kilometres after 5,000 km. For 2023, the rate is 68 cents per kilometre for the first 5,000 km and 62 cents for additional kilometres after 5,000 km. This rate is set to capture the fuel costs, repairs, maintenance and insurance for your vehicle, so they don’t need to be tracked separately. This is how Angie will be able to write off part of her new car.

2.  INTEREST EXPENSE

If you’ve just bought a practice, or maybe just bought the building your practice operates from, you may have used personal funds to pay for part of the purchase.

The interest on money borrowed from a line of credit, home equity line of credit, or even a mortgage refinancing that’s borrowed to fund an income producing asset (like a veterinary practice) can be claimed as a deduction on your personal income tax return, provided that the sole purpose of the funds was income earning.

Financial Hygiene

I refer to tracking expenses properly as financial hygiene. Knowing what expenses are deductible is only half the challenge; remembering to claim them is just as important. This is where financial hygiene comes into play.

I recommend that all business owners have a dedicated credit card for all business expenses and a business bank account where business revenues are deposited and any business expenses that you can’t pay with a credit card are paid from.

For locums, this will make it easy to summarize your income and expenses at year-end. Simply download the CSV file from your bank for each account, sort by description, total by description, and you have a great start—no need to add up receipts at the dinner table.

For practice owners, this will make your bookkeeping far easier, as you won’t be trying to stitch together expenses from your personal card, a couple of different bank accounts and a business credit card, while making sure that you’re claiming all the business expenses, but not mixing in any personal expenses. Mistakes happen. You’ll inevitably buy something for your practice with your personal credit card and you’ll probably accidentally buy groceries with your business credit card. If you track these irregular mistakes and let your bookkeeper know, it’s still much easier to have 99 per cent of your expenses handled properly.

My second recommendation is to set up a cloud document management system. The two that we use most frequently are Dext and Hubdoc. At their most basic levels, these two apps are cloud-based filing cabinets. When you upload a receipt, their systems extract the data on the receipt using optical character recognition and archive that receipt. This way you don’t need to keep boxes of receipts around, and you have access to the records if your accountant or the Canada Revenue Agency needs a copy.

In the end, we decided that Angie’s vehicle shouldn’t be claimed as a business expense. When we discussed the risks, she ultimately wasn’t comfortable. But we were able to discuss other aspects of her practice and make sure that she had the systems in place to capture her genuine expenses, archive the receipts, and make sure that we were claiming other fringe expenses that were legitimate in support of growing and maintaining her practice.

Greg Toner, CPA, CA, TEP, CLU, is principal at VetCPA.

Reprinted from the Ontario Veterinary Medical Association’s Focus magazine www.ovma.org