A prepaid expense is a payment made in advance for goods or services to be received later, recorded as an asset until the benefit is used up.
When you pay for something before you use it, insurance for the year, rent for next month, an annual software subscription, you have not yet received the benefit, so it is not yet an expense. Under accrual accounting it is recorded as a prepaid expense, an asset, and expensed gradually as the benefit is consumed.
Prepaid expenses are the mirror image of deferred revenue. For tax, the general rule is that prepaid amounts are deductible over the period they relate to, not all in the year paid, so paying next year's costs early does not usually accelerate the deduction.
You pay $12,000 for a one-year insurance policy in January. It is recorded as a prepaid asset and expensed at $1,000 a month as coverage is used, rather than a $12,000 expense all in January.
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Property tax is an annual municipal levy on real estate, charged by the city or town where the property sits rather than by the CRA. The bill is the assessed value of the property multiplied by the tax rate the municipality sets each year, and it funds local services such as roads, waste collection, policing and the education portion the province adds. Assessed value is set by a provincial assessment authority, so it is not the price you paid.
Multiply the assessed value of the property by the tax rate for its property class. Assessment is set by a provincial assessment authority on its own cycle and increases are often phased in, so the value lags the market. The rate is set each year by the municipality out of its budget, with an education portion added by the province. Both figures appear on your notice, which is why identical homes in different municipalities carry different bills.
The spouse or common-law partner amount is a non-refundable credit you claim when you support a spouse whose own net income is low. The claim starts at a set base amount and is reduced dollar for dollar by your spouse net income, so it disappears once their income passes that level. Its cash value is the claim multiplied by the lowest tax rate, federally and again provincially. Take the current base amount from the federal schedule for the year you are filing.
Deductible contributions are those to a registered retirement savings plan, a registered pension plan and a first home savings account. Contributions to a tax-free savings account, a registered education savings plan or a registered disability savings plan are not deductible, since the benefit comes from sheltered growth and government grants instead. Charitable and political contributions produce non-refundable credits rather than deductions, and amounts contributed above your available room can attract a monthly penalty tax.
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Reviewed and fact-checked by Udit Gupta
Ex Big 4 — Ernst & Young, Deloitte · International & cross-border tax specialist · CPA Canada (In-Depth Tax Program) · Chartered accountant, ICAI & MIA
Udit Gupta has over 15 years of experience helping corporations and business owners with corporate structuring, corporate tax filing, bookkeeping, payroll, GST/HST, cross-border tax and CRA representation. Big 4 trained at Ernst & Young and Deloitte, and qualified as a chartered accountant in India and again in Malaysia, he founded his accounting practice in 2014 to serve entrepreneurs, startups and non-resident business owners across Canada. View full member bio.
The Institute of Chartered Accountants of India — member 521458 · Malaysian Institute of Accountants — member CA 44667 · Ex Big 4: Ernst & Young, Deloitte · CPA Canada (In-Depth Tax Program), completed 19 Dec 2023 · In-Depth GST/HST Part I, 12 Jul 2022 · Part II, 5 Jul 2023
Editorial policy. Every page is researched against primary sources — the Income Tax Act, CRA publications and CPA Canada guidance — and every rate or threshold is stated with the tax year it applies to.
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