Business Expense Deductions

1. The general deductibility test

An expense is deductible if it was (a) incurred to earn income from the business, (b) reasonable in the circumstances, and (c) not specifically denied by another section. Capital outlays are deducted over time via CCA, not in the year incurred.

2. Home office — detailed method

Deductible if the home is your principal place of business, or it is used exclusively to earn business income and to meet clients regularly (ITA s. 18(12)). Deduct the business-use % (room size ÷ home size, possibly weighted by hours) of:

• Mortgage interest (not principal), property tax, home insurance, utilities
• Rent (for tenants — usually the biggest claim)
• Minor repairs & maintenance
• Internet (business-use portion)

Home-office loss can't create a business loss — it carries forward to a future profitable year (s. 18(12)(b)). The pandemic-era $2/day flat-rate method ended after 2022.

3. Vehicle expenses

Keep a logbook (total km / business km). Deduct business-use % of fuel, insurance, registration, maintenance, parking and lease payments. CCA Class 10 (under $30k + tax) or Class 10.1 (over $30k — capped). Class 54 for zero-emission passenger vehicles ($61,000 cap for 2025; 30 % rate + Accelerated Investment Incentive). See the CCA Classes Reference.

4. Meals & entertainment

50 % deductible (ITA s. 67.1). Long-haul truckers get 80 % during eligible travel periods. Meals at conventions are deemed to include a $50/day meal cost (also 50 % deductible). Office holiday parties (≤ 6/year, available to all employees) — fully deductible.

5. Professional fees, supplies, software

• Accounting & bookkeeping fees
• Legal fees to earn income (not personal litigation)
• SaaS subscriptions (Adobe, Figma, QuickBooks, etc.)
• Office supplies, postage, courier

6. Travel expenses

Transportation, accommodation and 50 % of meals while travelling for business. Conventions: maximum 2 per year (s. 20(10)) and must be held within the territorial scope of the sponsoring organisation.

7. Insurance

• Commercial general liability, professional liability, business interruption — fully deductible
• Vehicle insurance — prorated by business-use %
• Life insurance — only deductible if assigned as collateral for a business loan (s. 20(1)(e.2))

8. Phone & internet

Business-use portion only. Dedicated business line — 100 %. Shared cell phone — track usage.

9. Subcontractor payments & T4A

Payments to subcontractors are deductible. If you paid an individual or unincorporated business more than $500 for services in the year, a T4A slip must be issued by 28 February (Reg. 200(1)). Construction industry uses T5018 instead with a 6-month filing window after fiscal year-end.

10. Health & dental — NOT on T2125

Self-employed health and dental premiums (via a PHSP) are deducted at line 22300 of T1, not on T2125. Limits: $1,500 for self / spouse, $750 per child (s. 20.01).

11. Capital vs current expense

A repair to restore an asset to working condition is a current expense (deduct fully). An improvement that extends useful life or adds value is capital (depreciate via CCA). The distinction is fact-specific and one of the most litigated areas (Canderel Ltd [1998] 1 SCR 147).

12. Not deductible

• Personal living expenses (s. 18(1)(h))
• Fines & penalties imposed under law (s. 67.6)
• Golf club dues & recreational facility memberships (s. 18(1)(l))
• Political contributions (only the federal credit applies)
• Income tax instalments
• GST/HST collected (it's not your money)