Business Credit Cards and Tax Deductions

Business credit cards offer the ease of managing business expenses efficiently and effectively.  A business credit card is an excellent tool for tracking business expenditures. These expenses may be eligible for tax deductions. A tax deduction is an expense that can be subtracted from a business's revenue to calculate its net profit. This reduces the overall profit on which tax is calculated, thereby lowering your tax liability. The credit card statement provides a convenient record of potential deductions, but the eligibility of each expense is determined solely by the rules set by the Canada Revenue Agency (CRA).

Now, let's explore the prerequisites for applying for tax deductions and the types of expenses that are tax-deductible. We offer a comprehensive guide to business credit cards and their associated tax deductions.

What is a tax deduction?

If you are not familiar with the concept of tax deduction, let me explain it in simple terms for you. Tax deduction refers to the reduction in the amount of tax you owe to the state or government. It is the deduction of business-related expenses from a company's revenue, which means that the company's tax liability will be lower as its profits are now lower.

Business credit cards and tax deduction

Claiming a business expense as a tax deduction in Canada is a formal process governed by the Income Tax Act. The Canada Revenue Agency (CRA) oversees these regulations, and as the taxpayer, you are responsible for maintaining complete records to justify each deduction. While your business credit card statement is an excellent tool for tracking expenditures, it is important to remember that it is simply a record. The eligibility of any expense depends entirely on its compliance with CRA guidelines. 

Criteria for deducting business expenses

To ascertain whether transactions are conducted for business activities, there are some criteria that you have to meet. This criterion will help you understand the prerequisites to determine that the expenses you have incurred are directly related to business activities and have helped you fulfill the needs of your business. Here is the general criterion that you need to achieve to enjoy the perks of tax deduction.

The Three Core Tests for Every Expense

Every expense you claim must be able to pass three fundamental tests required by the CRA. If an expense fails any one of these tests, it is not deductible.

1. The Business Purpose Test 

This is the most important test. You must be able to prove that the expense was made with the clear intention of generating revenue for your business. The business itself must be a commercial activity with a reasonable expectation of profit. Personal expenses, even if paid with a business credit card, are never deductible.

2. The Reasonableness Test 

The amount of the expense must be reasonable in the circumstances. The CRA has the power to deny the full amount of a claim if it is deemed excessive or extravagant. For example, booking a luxury presidential suite for a routine solo business trip would likely be considered unreasonable, and the CRA could limit your deduction to the cost of a standard room.

3. The Proof Test (Record-Keeping) 

The burden of proof is always on you, the taxpayer. You must have complete, organized records to support every expense you claim. This means keeping all original source documents, such as itemized receipts and invoices, in addition to your credit card statements. These records must be kept for a minimum of six years after the end of the last tax year they relate to, as the CRA can request them at any time within that period.

The Critical Importance of Separating Expenses

It is imperative to maintain a strict separation between your business and personal finances. Using a single credit card for both types of transactions creates significant administrative challenges and can raise red flags for the CRA.

When business and personal expenses are mixed on one card, you are responsible for meticulously separating them and proving the business nature of each claim. Furthermore, you cannot deduct the entire annual fee of the card. You must pro-rate the cost based on the percentage of business use, a calculation that can be difficult to substantiate during an audit.

Using a dedicated business credit card is the most effective solution. It isolates all your business transactions, simplifies your bookkeeping, and makes justifying your expenses to the CRA a much more straightforward process.

Business credit card and deductible expenses

To be tax-deductible in Canada, an expense must be reasonable and directly related to earning business income. Here are some common examples of what you can and cannot deduct.

Common Deductible Expenses

• Office & Operating Costs: Includes office supplies, software subscriptions, business insurance premiums, and website hosting.
• Professional Fees: Fees paid to lawyers, accountants, or consultants for business advice.
• Advertising: Costs to promote your business, such as online ads or business cards.

Expenses with Special Rules

• Home Office: You can deduct a portion of your home expenses (like heat, electricity, or rent) only if your home is your main place of business OR you use the space exclusively and regularly to meet clients. The deduction is based on the size of your workspace relative to your home.
• Meals & Travel: While you can deduct the full cost of flights and hotels for business trips, you can only deduct 50% of the cost of meals and entertainment.
• Large Purchases: Major purchases like computers, equipment, or vehicles are not fully deducted in the year you buy them. Instead, their cost is written off gradually over several years.

What Is Not a Business Deduction

• Charitable Donations: For sole proprietors, these are claimed on your personal tax return for a tax credit, not deducted from your business income.
• Commuting: The cost of travel between your home and your regular place of work is considered a personal expense.

Tax-deductible credit card fee

Deductibility of Credit Card Fees and Interest

In Canadian tax law, the costs associated with borrowing money for the purpose of earning business income are generally deductible. This principle extends directly to business credit cards, where various fees and interest charges are considered a legitimate cost of doing business.

When using a credit card for your business, the following related costs are typically deductible:

• Interest Charges: The most significant deductible cost is the interest accrued on balances that are directly related to the purchase of business goods and services.
• Annual Fee: The full annual fee of a credit card used exclusively for business is deductible. If a card is used for both business and personal expenses, you must prorate the fee and can only deduct the portion attributable to its business use.
• Transaction-Specific Fees: This includes various fees charged by the issuer for specific actions, such as:
• • Fees for foreign currency transactions on international business purchases.
  • Fees for business-related cash advances.
  • Fees associated with balance transfers are used to manage business debt.
• Late Payment Penalties: Penalties charged by the financial institution for late payments on your business account are also generally deductible.

In essence, if a fee or charge is a direct consequence of using credit to finance your day-to-day business operations, it qualifies as a deductible expense against your business income.