Start-up costs before you open: what you can deduct

The start date decides what you can deduct

The CRA’s starting point is simple: to deduct a business expense, you must have carried on a business in the fiscal period when you incurred it. That is why the CRA tells owners to be very clear about the date the business started. An expense that came before that date is not automatically lost for planning purposes, but it cannot be treated as an ordinary business expense in the way a later cost can.

The CRA looks at each case on its own facts. Its general view is that a business starts when you begin some significant activity that is a regular part of the business or that is necessary to get the business going. There is no single form to file that fixes the date, so you need to be able to explain it from your records.

What research alone does not do

The CRA gives a plain example. If you research how to start a business in the hope of going into some kind of business, that is not a significant activity that is a regular part of the business. The business has not begun at that point, and the CRA says you cannot deduct the costs of the research.

This catches people who spend on courses, market studies, travel to look at opportunities or early consultations before they have settled on a specific business. The CRA’s older commencement bulletin, which is archived but still the one the CRA points to, says a business is merely contemplated if no serious or reasonably continuous efforts are being made to begin normal operations. Treat that wording as context rather than current policy, and describe your own steps in writing.

Steps that point to a real start

The CRA offers a second example. If you decide to buy enough goods for resale, or the equipment you need, to start your business, it would consider that the starting point. From then on you can usually deduct the expenses you incur to earn income, and you could still deduct them if the business ended despite your efforts.

In practice, a firm decision on the specific business, a lease or workspace, supplier orders, equipment purchases and steps to find customers can all be evidence that you have moved past exploring. They are not a checklist that guarantees a date. Which step counts as the start in your situation is a judgment to make with your accountant before you file, not after.

Sorting early costs into groups

Once you have a start date, sort what you spent into three groups. First, costs before the date, such as research. Second, ordinary costs after the date, such as advertising, supplies, professional fees and insurance, which are reviewed under the normal business-expense rules. Third, purchases of long-lasting property such as equipment, which are generally recovered through capital cost allowance rather than deducted in one amount.

Inventory bought for resale belongs with the cost of goods you will sell. Costs you paid personally for something used partly for the business need a reasonable business-use portion. The CRA’s business expenses page and its capital cost allowance page explain each category, and neither replaces the judgment about where a particular purchase sits.

An illustrative example

The numbers here are round and for illustration only. Suppose that in January you spend $600 on courses and meetings to decide whether to open a bookkeeping practice. In April you buy a computer for $3,000 and start contacting clients. In May you pay $800 to set up a website and $400 for business insurance.

If April is your start date, the $600 spent in January is research before the business began, so you should not plan on deducting it. The computer is capital property, generally claimed through capital cost allowance, and the website and insurance costs are reviewed as ordinary business expenses, including any personal-use portion. If instead your records show that you committed to a specific business earlier, the answer for the January costs could differ. The dates in your records carry the argument.

GST/HST on purchases made before you register

If you register for GST/HST, input tax credits can recover tax you paid on business purchases, and the CRA lists business start-up costs among the expenses that may qualify. The rules for a new registrant have limits. If you were a small supplier immediately before registering, the CRA treats you as having bought certain property you held for your commercial activities, such as capital property and inventory, when you registered, which may allow a credit.

You can also claim credits for tax on services supplied to you after you became a registrant, and on prepaid rent for the part of the period after registration. You cannot claim credits for tax on services supplied to you before registering, even if you paid that tax afterwards. For most registrants the claim window is the due date of the return for the last reporting period ending within four years after the period in which the credit first became available. Our article on your first GST/HST return and the input tax credit term cover the mechanics.

Records to start keeping on day one

Keep a dated note of the steps you took and when: the date you decided on the business, the first purchase for resale, the first supplier or lease commitment, the first customer contact. Keep every receipt and invoice from before you opened, even those you expect not to deduct, with a line explaining what each was for.

Open a separate bank account early so personal and business spending do not blur together, and write down what you paid personally and what you plan to treat as business. If you plan to incorporate, mention it early, because costs paid personally before a corporation exists raise separate questions about who incurred them and how to reimburse you.

What to bring to your accountant

Bring your timeline, your receipts grouped by date, any quotes or contracts, and your plan for registering for GST/HST and for incorporating. Ask which date your accountant considers the start, how each early cost should be treated, and whether any purchases should be timed differently. A short conversation before you open is usually cheaper than reconstructing the story at filing time.