Tax deductions for contractors and trades in Ontario

The test every deduction has to pass

The CRA’s general rule is that a business expense must be reasonable and incurred to earn business income, and that you can claim only the business part of a cost that also has personal use. That applies whether you work alone on a site or run a small crew. If you are a sole proprietor, the expenses go on Form T2125 with your personal return. If you work through a corporation, the same ideas apply, but the corporation claims them on its own T2 return.

Before looking at categories, it helps to be clear about who is paying you. If one contractor directs your hours and supplies the tools, the CRA may see an employee rather than a self-employed worker, and the deductions below would not be the same. Our article on contractor misclassification risks explains how that question is decided.

Tools: under $500 and $500 or more

For small tools, the CRA’s rule is simple. If a tool costs less than $500, you can deduct its full cost in the year you buy it, either as an expense or by putting it in capital cost allowance Class 12 at a 100% rate. Choose one method and do not claim the same tool twice. Most small tools in that class are not subject to the half-year rule, which would otherwise cut the first-year claim.

A tool that costs $500 or more is added to your CCA schedule, generally as Class 8 property at 20%. As an illustration, a $1,200 compressor would produce a first-year claim of $120 if the half-year rule applies ($1,200 × 20% × 50%), then a smaller claim as the balance declines. That is a simplified example, and the first-year treatment can differ if you qualify for an accelerated incentive. Ask your accountant before you buy a large item near year-end.

Selling used equipment has a tax result too. The CRA says you include in income any recapture of CCA when you sell depreciable property such as tools, so a sale for more than the remaining depreciated balance can add to your income.

Your truck and the cost of getting to the job

Motor vehicle costs are claimed by the share of driving that was for business. The CRA’s method is to divide business kilometres by total kilometres and apply that fraction to your running costs, such as fuel, insurance, licence and registration, repairs and loan interest. For example, if you drove 20,000 kilometres, 14,000 of them for business, and the truck cost $9,000 to run, the illustrative business share is 70%, or $6,300.

The CRA expects a logbook or equivalent record to support the fraction. Hauling materials and tools to a site is a typical business trip, so write down the destination and distance when it happens. Our article on vehicle expenses and logbook rules covers the records and the rules for vehicle claims in more detail.

Materials, repairs, insurance and licences

Materials you buy for a job are part of the cost of earning that income, and you should keep them separated from personal purchases at the same supplier. On Form T2125 the CRA lists a number of ordinary lines that suit a trade business, including insurance premiums on machinery and equipment used in the business, business taxes, licences and memberships, office expenses, and the cost of labour and materials for minor repairs to property you use to earn income.

There is a boundary worth knowing. You cannot deduct the value of your own labour, and the cost of a repair that is capital in nature is generally claimed through CCA rather than as a current expense. Fines and penalties are generally not deductible, and neither are most life insurance premiums. If a cost seems partly personal, claim only the business share.

Phone, workshop and home office

A cellphone you use to earn income belongs under utilities on Form T2125, limited to its business use. If you run estimates, scheduling and invoicing from a room at home, the business-use-of-home line may apply, but the CRA limits it to the business part of your costs and has conditions on the workspace. Our articles on home office expenses for self-employed people and on cell phone and internet costs go through both.

A shop or storage unit you rent for the business is a separate matter. Rent for property used in the business is deductible, and it has nothing to do with the home-office rules. Keep the lease and the payment record.

GST/HST on a trade business

If your taxable sales are more than $30,000 over four consecutive calendar quarters, you generally have to register for GST/HST, charge it to customers and remit it. Below that, you are a small supplier and registration is optional. Once you are registered, you can claim input tax credits for the GST/HST you pay on materials, fuel, repairs, tools and other costs that relate to your commercial activities.

The CRA sets documentation levels by purchase size. A purchase under $100 needs the supplier name, date and total. From $100 to $499.99 the supplier’s registration number and the tax amount are added. At $500 or more you also need your name, a description and the payment terms. A photo of a receipt from a hardware store counter is only useful if it shows those details. Our guide to GST/HST registration questions and our GST/HST service page cover the registration decision in more detail.

Paying subcontractors: the T5018 duty

If construction is more than 50% of your business income and you pay Canadian-resident subcontractors for construction services, you generally have to report those payments on T5018 slips, or on a listing with the same information, when you pay a subcontractor more than $500 in the year before GST/HST. Payments for goods only are not included, and payments to non-residents are handled differently. Barter payments are reported at the fair market value of what you gave or received.

Collect each subcontractor’s legal name and either their SIN or their 15-character program account number before the first payment, not at the end of the year. If you do not qualify because construction is not your main activity, the T4A rules may apply instead. Our guide on T5018 contract payments sets out the steps. Treat a worker who is really an employee as a payroll question, not a subcontractor one.

Records and what to bring to your accountant

The CRA says to keep records for at least six years from the end of the last tax year they relate to. For a trade business that means invoices, supplier receipts, bank and card statements, the logbook, the CCA schedule, subcontractor details and the lease or insurance papers. A separate business bank account makes the year much easier to sort.

Bring a list of tools and equipment bought with their dates and costs, your vehicle totals, any T5018 slips you issued or received, and your GST/HST figures if you are registered. If the money is tight at tax time, our article on how much to set aside when self-employed covers the instalment side. A short conversation about timing a large purchase can be worth more than a rushed receipt search in April.