Financial accounting and business operations are closely intertwined and serve stakeholders such as shareholders, investors, lenders, and regulatory agencies by providing comparative and coherent financial statements. To achieve this, accounting uses consistent methods when recording transactions. This is distinct from tax accounting, which serves the interests of taxpayers and revenue collectors by accurately reflecting income for each taxable year. Some expenses and algorithms that are permitted in accounting are not allowed in tax laws.
Expenses eligible for tax deduction must follow the principle of reasonableness and must be made for the purpose of earning business income or asset returns. Capital outlays, losses, depreciation, and depletion are not directly deductible for tax purposes and must be deducted annually in accordance with tax laws.
Reserve funds, contingent liabilities, and sink funds cannot be used for tax deduction unless they are specifically allowed under Tax Law PART I. 20(1) for the following six exceptions:
Personal living expenses are not tax deductible, unless they are for meals and lodging during business travel.
Expenses for purchasing and maintaining recreational facilities or fees for sports, dining, or entertainment clubs are not tax deductible, except for businesses that are themselves engaged in entertainment.
Political contributions are not tax deductible.
Payments made to employees in excess of CRA-specified reasonable allowances are not deductible, unless they are deductible based on the employee's income and the employee is required to pay tax on this income.
Fines or interest imposed for illegal or improper actions are not deductible for tax purposes.
Prepaid expenses are not deductible for tax purposes.
Comments