How to Deduct Web Related Outlays

By L.Kenway BComm CPB Retired

Edited April 25, 2024  |  Updated January 15, 2024  |  Originally published on Bookkeeping-Essentials.com in 2014.

WHAT'S IN THIS ARTICLE
CRA's Perspective | ASPE Perspective | Domain Name & Registration | Web Hosting | Web Design | Wrap-up

NEXT IN SERIES >> Self Employed Tax Deductions

Domain registrations, web hosting services, web design services ... where do you classify these self employment tax deductions? Are they an intangible asset, a license or an expense? It depends on the purpose of your website and on the time period ... so read this whole section before you make your choice.


Business owner working on content for her website.


After much research, here is my opinion on your self employment tax deduction options ... but you really need to discuss this with your accountant as it will depend on your unique situation.

What CRA Says About Website Related Outlays

Caution - Talk to Your Accountant

Please use the information in this section more for talking points with your accountant ... so you have a better feel for what kind of information you are seeking. Your accountant will customize advice specifically for your situation. Think of it like this ... Having a map BEFORE you enter the forest is so much better than getting lost in the forest!

CRA Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance states "The Act and Regulations do not define what constitutes a capital expenditure [or the treatment of website development costs]. However, the guidelines discussed in [paragraphs] 1.4 to 1.12 can help determine whether an expenditure is capital in nature or deductible on income account as a current expense. No single guideline is determinative. ... In the event that an expenditure includes both current and capital elements and these can be identified, an appropriate allocation of the expenditure is necessary. Where only a minor part of the expenditure is of a capital nature, the CRA's practice is to treat the whole expenditure as a current expense."

CRA's information on E-commerce states "Whether a website development cost is current or capital is always a question of fact. If a website development cost is a capital cost, it may be for the acquisition of "general-purpose electronic data processing equipment" and therefore included in Class 10(f), or it may be for the acquisition of computer software and therefore included in Class 12(o). ... 

In general, computer software or website development costs are either:

  • current and deductible in the year they are incurred
  • capital and deductible under the rules in the Income Tax Act for capital cost allowance"


Website Related Outlays -- From an Accounting Perspective --

A BDO paper titled ASPE - IFRS: A Comparison - Intangible Assets explains "ASPE provides the ability to make an accounting policy choice to either expense or capitalize developments costs that meet the recognition criteria. While IAS 38s recognition criteria for development costs are consistent with ASPE, IFRS does not allow such an accounting policy choice. Instead, if development costs meet the recognition criteria, they must be capitalized."

The recognition criteria of an intangible asset such website development costs are:

  1. identifiability (is separable or arises from contractual or other legal rights)
  2. control (power to obtain benefits from the asset)
  3. future economic benefits (such as revenues or reduced future costs)

When this issue was first emerging, the CICA Handbook Emerging Issues Abstract EIC-118 "Accounting for Costs Incurred to Develop a Web Site" (ASC 350-50 in the US) provided guidance regarding intangible website costs were broken into 5 categories:

  1. planning (develop a project plan to make it happen) - expense it;
  2. website application and infrastructure development (acquire or develop hardware and software to develop to operate the website) - capitalize it;
  3. graphics development (website design) - capitalize initially then expense;
  4. content development (information on the website which may be textual or graphical) - expense it; and
  5. operating costs (includes registering the website)- generally expense it.


Domain Name And Registration -- Current Expense Website Related Outlays --  

Given CRA's guidance on the matter:

Domain registration could be categorized as advertising on line 8521, if the purpose of your site is to advertise and promote your business and/or products and services.

You could also choose dues and subscriptions on line 8760 as a category if the fee is only for a one year or less time period ... and your site is used to provide information more than for advertising.

If you paid over $500 for the domain name and registration .... and it has a life that is greater than a one year time period, you need to capitalize it under class 14.1 - property that does not physically exist but gives you lasting economic benefit such as licenses.

---

Background: Eligible capital property rules were repealed 2016 and transitioned in 2017 to the rules for depreciable property included in class 14.1. It is now included at 100% inclusion rate (previously 75%) with a CCA rate of 5% (previously 7%) on a declining balance basis.

---

As the majority of domains allow the registrant an automatic right to renewal for an indefinite period, you would take an annual allowance of 5% on line 9936. 


Website Hosting Services -- Current Expense Website Related Outlays -- 

Web hosting services could be categorized as advertising on line 8521 or other expenses on line 9270 ... again it depends on the purpose of your site.

It is also possible you may want to classify these web related outlays on line 8760 dues and subscriptions, if you pay a monthly subscription fee.


Website Design Services -- Current Expense Website Related Outlays -- 

If you paid under $500 for web design services, it is fully deductible in the year the expense was incurred.

If you paid over $500 for web design services, you run into ITA (Income Tax Act) limitation rules. This type of self employment tax deduction could be capitalized under class 50 (computer related amounts) ... because the web site will last more than one year and claimed at the CCA rate of 55% of the declining balance annually. Or it could be classified under class 12 as computer software that is not systems software. Costs would be expensed over 2 years.

An argument could be made to expensing the whole amount and categorizing it under other expenses on line 9270 ... but I would leave that decision to your accountant as you need to be able to support your classification if you are audited by CRA.

For further guidance, see CRA tax interpretation letter 2013-0507121e5.


Web Related Outlays Wrap Up

As you can see, this is a complicated area in self employment tax deductions. When deciding whether a web development cost is to be expensed or capitalized; make your decision based on fact and follow CRA's IT-128 guidelines to assist in your decision making as the ITA has no specific provisions for website development costs ...

or you could be kind to yourself and delegate the classification of your web related outlays to your accountant.


Canadian Income Tax Primer