What business expenses can I deduct in Canada?

The general rule and its two limits

The Income Tax Act permits deduction of outlays made to earn income from a business. Two constraints do most of the work in practice.

First, reasonableness. An expense must be reasonable in the circumstances. Paying a family member $80,000 for occasional administrative help fails this test regardless of documentation.

Second, the personal-use split. Where an expense has both business and personal components — a vehicle, a phone, a home — only the business portion is deductible, and you must be able to demonstrate the proportion.

Vehicle expenses and the logbook that defends them

You may deduct the business-use share of fuel, insurance, maintenance, licensing, lease payments or capital cost allowance, and financing interest. The share is business kilometres divided by total kilometres for the year.

A logbook is what makes the claim defensible. The CRA accepts a full-year log, or a representative three-month sample supported by a full base-year log. Without one, the CRA can and does reduce claims to whatever it considers reasonable, which is usually far less than the truth.

Note that travel between home and a regular place of business is personal commuting, not business travel — a distinction that surprises many first-time claimants.

Home office: the two tests

A home workspace is deductible if it is either your principal place of business, or used exclusively for business and regularly for meeting clients.

Deduct the business proportion — usually square footage of the workspace over total finished area — of rent or mortgage interest, property tax, utilities, insurance and maintenance. Homeowners should generally avoid claiming CCA on the home itself, as it can jeopardise the principal residence exemption on eventual sale.

The home office deduction cannot create or increase a business loss, but unused amounts carry forward to future years.

Capital cost allowance instead of immediate deduction

Assets with lasting value — equipment, vehicles, computers, furniture, buildings — are not deducted in full when purchased. They are capitalised and depreciated over time through capital cost allowance, at rates set by asset class.

Common classes include Class 8 (furniture and general equipment, 20%), Class 10 (vehicles, 30%), Class 50 (computer hardware, 55%) and Class 12 (tools and software under threshold, 100%). The half-year rule generally limits the first year to half the normal rate.

CCA is optional, which is an underused planning lever. In a low-income year you may claim less, preserving the undepreciated balance for a year when it shelters income taxed at a higher rate.

The 50% rule on meals and entertainment

Business meals and entertainment are generally limited to 50% of the amount paid. This applies to client meals, tickets and hospitality alike.

Limited exceptions permit 100%: meals provided at an event for all employees (up to six such events a year), meals billed through to a client and disclosed as such, and certain remote worksite arrangements.

Document the business purpose and who attended. A receipt alone establishes that money was spent, not that it was spent to earn income.

Commonly missed legitimate deductions

• Professional fees — accounting, legal and consulting related to the business
• Business insurance, including liability and errors-and-omissions coverage
• Bank charges and interest on business borrowing
• Professional dues and licences, plus subscriptions to trade publications
• Training that maintains or updates existing skills
• Advertising, with a Canadian-media requirement for certain broadcast and periodical advertising
• Salaries to family members, where the work is real and the pay reasonable

What is not deductible, whatever you have been told

Personal living expenses, clothing suitable for ordinary wear (including most business attire), club membership dues where the main purpose is dining or recreation, fines and penalties, and the personal portion of any mixed-use expense.

Political contributions and most charitable donations are also excluded as business deductions, though they may generate personal credits. Life insurance premiums are generally non-deductible unless the policy is assigned as collateral for business borrowing.