For a small business, one of the hardest moments is the transition between being a self-employed business owner to one who starts employing other people and dealing with all the insurance, taxes, and paperwork that come with it. Still, if you want your business to grow, that’s a headache you’ll eventually have to deal with, and if you need to send someone out to solicit new customers and clients or work out contracts with new suppliers, then you’ll need to understand travel and subsistence expenses.
Technically, you aren’t required to pay for your employees’ travel expenses, at least not in Canada. You’ll pay for them one way or another since an employee is on the clock while he or she is on a business trip for your sake, but the reason you’d want to pay for these expenses is because you get a tax deduction. Employees can get the same deduction if you don’t compensate them for travel and subsistence expenses, but very few of them will object to you taking on the costs yourself.
Under Canadian law, deductible travel and subsistence expenses include food, beverages, lodging, entertainment, and public transportation costs, but they don’t include other costs like fuel, car maintenance, or airline tickets. The first two are sometimes deductible, but only for company-owned vehicles.
The exact amount you can deduct is intentionally vague. The idea is that the law applies equally to travelling salespeople sleeping in a different motel each night along with high-level meetings between corporate CEOs, and so the law says you can deduct 50 percent of the actual cost or “an amount that is reasonable in the circumstances.” So if the salesperson ate lobster and caviar every night, a revenue auditor would consider that unreasonable and lower your deduction. On the other hand, if two CEOs eat at a family restaurant, they can only deduct half the cost of the meal.
Of course, you don’t have to limit your covered travel and subsistence expenses to the ones that come with a tax deduction. Employees appreciate perks and benefits like completely covered travel costs, so paying for them out of your pocket instead of the employee’s salary or wage is an excellent way to attract good workers.
Business accounting is easy enough when you only have to worry about your own costs, but the rules change when you start hiring other people. So if you want to avoid making any mistakes on your tax returns and create the most attractive employee contracts, you should understand what those rules are.