The general rule: reasonable, and incurred to earn income
The CRA’s starting point is that you can deduct any reasonable current expense you incur to earn business income. Both words matter. The expense must have a business purpose, and the amount must be reasonable in the circumstances. A legitimate category of expense can still be challenged if the amount is out of proportion to the business.
Where an expense has a personal element, only the business part is deductible. The same mobile phone, vehicle or internet plan can be partly business and partly personal, and the split needs a defensible basis. Keep receipts and, where the split is not obvious, a note of how you arrived at it. Records must generally be kept for six years from the end of the tax year they relate to.
Meals and entertainment
Food, beverages and entertainment are limited to 50% of the lesser of the amount incurred and a reasonable amount. The limit applies whether the meal is with a client or while travelling on business. Record who attended and the business purpose, because a receipt alone does not establish that a meal was for business.
The CRA guide lists exceptions where the 50% limit does not apply, including up to six events a year to which all employees at a location are invited, amounts billed to a client and shown on the invoice, and businesses that sell food or entertainment as their product. Long-haul truck drivers have a higher percentage during eligible travel. Ask before assuming an exception applies.
Business use of a home
A workspace in your home qualifies when it is either your principal place of business, or is used only to earn business income and used regularly and continually to meet clients. Calculate the business percentage from the area used for business relative to the home’s total area, and apply that percentage to eligible costs such as rent, utilities, insurance, maintenance, property taxes and mortgage interest.
The deduction cannot exceed net income from the business and cannot create or increase a loss. Any unused amount can be carried forward to a later year. Claiming capital cost allowance on a home has consequences when the home is sold, so most owners deliberately do not claim it; raise the question rather than letting software decide.
Vehicle expenses and the logbook
Motor vehicle expenses are deductible in proportion to business use, and the CRA expects a logbook to support that proportion. A full logbook records the date, destination, purpose and kilometres of each business trip, plus the odometer reading at the start and end of the fiscal period. Commuting between home and a regular place of work is personal.
After a full year of records, the CRA permits a simplified method: keep a three-month sample logbook each year and use it against the base year, provided the result stays within 10% of the base-year business use. The base-year logbook must be kept for six years from the end of the tax year it was last used. Without a logbook, the business percentage is an estimate that is difficult to defend.
Current versus capital
A current expense is deducted in the year; a capital expense is added to the cost of an asset and deducted over time through capital cost allowance. The CRA distinguishes the two by asking whether the cost provides a lasting benefit, whether it restores property to its original condition or improves it beyond that condition, whether it replaces a separate asset, and, when those are unclear, how large the cost is relative to the property.
Painting a building is current; replacing the siding is capital. Repairing wooden steps is current; replacing them with concrete is capital. Repairs made to used property so that it is fit for use after you acquire it are capital even if the same work would otherwise be current. Equipment, computers, furniture and vehicles are capital regardless of how they were paid for.
What is not deductible
Personal and living expenses are not deductible, and the CRA is explicit that club membership dues, including initiation fees, cannot be claimed when the club’s main purpose is dining, recreation or sport. Expenses reimbursed by insurance are not deductible either. For a sole proprietor or partner, drawings or salary paid to yourself are not an expense; the profit is your income.
Costs to acquire capital property are not deducted directly, as described above. Fines and penalties, most income tax itself and personal portions of mixed-use costs are excluded. If an expense feels borderline, record it separately and ask, rather than burying it in a general category where it is more likely to be questioned later.
Your conversation checklist
- Receipts and invoices for every expense claimed
- Business purpose and attendees noted on meal receipts
- Home area measurements and eligible home costs
- Vehicle logbook with odometer readings for the year
- Separate list of assets purchased during the year
- Personal-use percentage for phone, internet and vehicle
- Insurance reimbursements received
- Borderline items flagged for discussion
Further reading & sources
- CRA: Business expenses
- CRA: T4002 Chapter 3 – Expenses
- CRA: Motor vehicle records
- CRA: Current or capital expenses
Tax rules and administrative requirements can change. Check the applicable official guidance and confirm your circumstances with a qualified adviser. This guide is not an assessment of your filing, payment or legal obligations.