Business? What business?
First, do you need to bother to at all? Is this a hobby with little hope of making a profit? Or is this an adventure in profit? If you're in it for fun, then it's a hobby and the government doesn't want to see any losses on your tax return. On the other hand, if your intent is to make money and there is the possibility that you may actually do so, then you have a business.
When starting a business don't register the business name, or sign up for the GST, or try to incorporate. Focus all your time on making money. You don't have to register for the GST until your gross sales in any four consecutive quarters exceeds $30,000. Your local municipality may want $100 for a license, but maybe it's just a hobby and it will probably be years before they catch you. Do nothing but make the business succeed. If at the end of the year the business is working out (or you're bold and want to claim the losses), then you must add a Statement of Business Activities to your tax return. The CRA Business Guide T4002 explains in detail how to fill out a Statement of Business Activities.
Accounting for Idiots!
In life, money comes in and money goes out. In business you have to track the money movements and place them within a particular time period. Is the cheque considered income when you received it in December, or when it cleared the bank in January? You need a consistent method of determining when money has changed hands. CRA will accept whatever method you come up with provided it doesn't manipulate your tax position. Someone who has everything running through a special bank account may find it easiest to only consider the transaction done when it appears on the bank statement. Otherwise, you need a simple way of recording income that can handle rubber cheques and bad credit cards. For expenses the goal is to not miss anything and to have a receipt; then, at year end, all you have to do is sort the receipts into categories and add them up. Simple.
With income there are no accounting tricks, common sense will tell you if you have received any money related to your business.
As to how much of what you receive is tax-return income? Auditors will demand to look at your bank statements and they will be expecting you to cheat.
To be claimed as a business expense, the money spent must be reasonable in the circumstances and incurred for the purpose of profit. The reasonableness-exception allows CRA to throw out any big expenses they don't like: so be humble. The pursuit-of-profit motive removes expenses that CRA considers personal-use. How exactly does one define personal-use? Doesn't many a penny go to more than one purpose?
The salaried employee doesn't get to deduct their clothes, or their groceries, or the cost of getting to and from work everyday. These are considered personal expenses. A self-employed person is bound by these same salaried-employee rules; they cannot deduct an expense that a salaried employee is denied. But salaried employees aren't out-of-pocket for the office rent or the paper clips. So everything else that is directed towards a business turning a profit is a legitimate deduction. And clearly, the more things you can relate to your business the greater your deductions will be and the less tax you will have to pay - and every CRA auditor knows that.
CRA has already set limits on the business-portion of many expenses (meals 50%, cars can't cost more than $30,000 + taxes). The problem is where there are no rules and you must guess how much of your computer, phone, internet, bank charges, car, and home can be safely written-off. Unless you keep detailed records (and no one does), the reasonableness of the money you try to deduct will always be a judgement call. My advice is that if you feel you can tie the expense to your business then make the claim, but remember that it is the meek that will inherit the earth. If you feel squeamish putting in a claim, don't do it - cheating on your income would probably be a safer bet. In the end, it is the relationship of the expenses to the income that matters. Claiming a massive business loss that nets you a refund of $2,000 or more is an invitation to an audit.
So far there are no tricks or traps. You just have to be reasonable and track the flow of money as it relates to your business. Everything is just common-sense: Income - Expenses = Profit.
Capital Assets - Here's the Rub!
But accountants are an anal lot and they want to match an expense to the income it generates. They feel that is the only way to see at an instant if a business is making money. Accountants worry that if you buy a car, that car could last 10 years and you could end up selling it to some fool for near what you paid for it. It can't be fair to write-off the whole car the instant that money has changed hands. To do so would drop your profit to nothing and ignore the nice car in the driveway. Accountants feel that, to be fair, each expense should be written-off over its useful life. But to do so would be an impossible chore.
The government taxes profits, and so they have sided with the accountants. The government has ruled that any expense expected to last for a few years and valued at $500 or more must be depreciated slowly over time. These expenses are called capital assets. CRA has sorted all the world's capital assets into classes, each class with its own rate of depreciation. This depreciation is called an allowance: Capital Cost Allowance (CCA).
So on a tax return, unlike regular expenses that just get added up in their categories, each capital asset must be listed individually and then lumped into its proper class. You must complete the CCA chart to figure out the annual depreciation of each class. You must also list all assets disposed of and factor in any monies received.
Money coming in is income and you have to add it up. You get to deduct from that income only the money going out that relates to your business. And that money going out can be either an expense or a capital asset. Simple.
Reasonably following the money trail, as I've stated above, will let you prepare your books so that someone who has read Business Guide T4002 should be able to easily finish up the rough edges and prepare your tax return. But why not read T4002 yourself, and go all the way?
Business Guide T4002 gives line-by-line instructions on how to complete the Statement of Business Activities (not all of which has to be filled in). T4002 adds depth to all I've said. It goes over all the expense categories stating what limits apply, and describes in detail the mechanics of Capital Cost Allowance.
But no matter how deeply you read the guide you will not find any special tax breaks, like the rich are always supposed to get. Every tax rule limits what you can deduct. The loopholes you have been hearing about are actually subtle forms of cheating. Being professionals, accountants must cheat only by twisting the rules. Luckily, small business owners get to cheat in a more forthright manner.