A deductible business expense in Canada is any reasonable current cost you incur to earn business income: rent, software, advertising, wages, professional fees, and the business share of your vehicle and home costs. The CRA applies two tests to every claim: the expense must have an income-earning purpose, and the amount must be reasonable in the circumstances. Personal spending, everyday clothing, government fines and recreational club dues never qualify, no matter how business-adjacent they feel.
What is the CRA's test for a deductible expense?
Before you claim anything, ask two questions. First, did you spend the money to earn business income? Second, is the amount reasonable for what you got? The CRA's own guidance on business expenses puts it plainly: you can deduct any reasonable current expense you incur to earn business income. Fail either test and the deduction is gone.
Two more distinctions matter. Current expenses (rent, supplies, fuel) are deducted in the year you incur them. Capital purchases (a laptop, a vehicle, shop equipment) are deducted gradually over several years through capital cost allowance. And anything with mixed business and personal use, like a car or a home, gets split: you claim only the business portion.
Which business expenses can you usually deduct?
Here are the categories that come up most often for the small business owners we work with, and where each one tends to go wrong.
| Expense | Deductible? | Watch out for |
|---|---|---|
| Office or shop rent and utilities | Yes, in full | Home-based? Use the home office rules below instead |
| Advertising and marketing | Yes | Keep invoices, not just credit card lines |
| Office supplies and software subscriptions | Yes | Annual prepayments may need to be spread over the period they cover |
| Accounting and legal fees | Yes | Fees for buying capital property are treated differently |
| Salaries, wages and subcontractors | Yes | Payroll remittances and T4/T4A slips must be handled correctly |
| Business insurance, bank fees, loan interest | Yes | Only the business account and business borrowing |
| Meals and entertainment | 50% only | Applies to the whole bill, including tax and tip |
| Vehicle costs | Business-use percentage | No logbook, no claim in an audit |
| Home office | Business portion | Must meet one of two CRA conditions |
| Equipment and vehicles (the asset itself) | Over time via CCA | Not a same-year, full-price write-off by default |
How does the 50% rule for meals and entertainment work?
You can claim 50% of the lesser of what you actually paid and what is reasonable in the circumstances. The limit applies to the entire bill, including GST/HST and the tip. Take a client lunch that runs $100 for food, $13 in HST and a $17 tip: the bill is $130, and your deduction is $65. The same 50% cap applies to meals while you travel for business and meals at conventions and conferences.
The CRA lists a few exceptions on its meals and entertainment page. The limit does not apply if your business sells food or entertainment for compensation (a restaurant, for example), if you bill the meal to a client and itemize it on the invoice, or for staff events, such as a holiday party, open to all employees at a location, up to six such events per year.
How do you claim vehicle expenses without a fight?
Vehicle costs are prorated by kilometres. Track the total kilometres you drive in the year and the kilometres driven to earn business income, then apply that percentage to your fuel, insurance, repairs, licence and registration costs. Say you drove 24,000 km in total and 9,600 km for business: that is 40%. If your running costs were $6,700, you claim $2,680.
The evidence the CRA wants is a logbook. Per the CRA's motor vehicle records guidance, record each business trip's date, destination, purpose and distance, plus your odometer reading at the start and end of the fiscal period. Keep a full logbook for one complete year to establish a base year. After that, you can keep a three-month sample logbook each year and extrapolate, as long as business use stays within 10 percentage points of the base year. A mileage-tracking app on your phone makes this nearly painless.
When can you deduct home office expenses?
Self-employed owners can claim business-use-of-home expenses only if one of two conditions is met: the space is your principal place of business, or you use the space only to earn business income and use it on a regular, ongoing basis to meet clients, customers or patients in person.
Calculate the claim on a reasonable basis, usually workspace area over total home area. A 140 square foot office in a 1,400 square foot home is 10%. If your rent is $26,400 a year and utilities are $3,000, you claim 10% of $29,400, which is $2,940. Owners can use the same approach with mortgage interest, property taxes, insurance and utilities.
One ceiling to know: home office expenses cannot create or increase a business loss. If your claim exceeds your net business income for the year, the unused amount carries forward, and you can deduct it in a future year as long as you still meet the conditions.
What can you never deduct?
- Personal living costs. Groceries, your family's phone plans, the personal share of any mixed-use expense.
- Everyday clothing. Suits, dresses and shoes are personal even if you only wear them for work. Protective gear and safety equipment required for the job are a different story.
- Government fines and penalties. Parking tickets, speeding fines and CRA penalties are not deductible. The parking ticket you got during a client meeting stays your problem; a paid parking receipt for that same meeting is a legitimate expense.
- Club memberships. The Income Tax Act blocks dues for any club whose main purpose is dining, recreational or sporting facilities. Golf and gym memberships fail even when you genuinely network there.
- Mostly personal travel. Tacking one meeting onto a week-long vacation does not convert the trip. Only the genuinely business-related portion qualifies.
What do real deductions look like in your industry?
Real estate agents
Staging costs you cover to sell a listing, lockboxes, signage, board and MLS dues, client meals at 50%, and vehicle costs backed by a logbook are all fair game. The suits you wear to showings are not. If you run a PREC, the corporation claims these expenses instead. Our accounting service for real estate agents is built around exactly this expense profile.
E-commerce sellers
Boxes, mailers, tape, labels and other packaging supplies are deductible, as are platform fees, payment processing fees, product photography and shipping. Inventory works differently: you deduct product costs as cost of goods sold when items sell, not when you buy stock.
Car rental businesses and Turo hosts
Cleaning and detailing between guests, platform fees, maintenance, insurance and the business share of financing costs are deductible, and the vehicle itself is written off over time through CCA. If you also drive the car personally, a logbook separating rental use from personal use is essential. See our car rental accounting service for how we structure this.
How do you prove it if the CRA asks?
Keep every receipt, invoice and contract for six years from the end of the last tax year they relate to. An itemized receipt beats a bank statement, because the statement shows what you spent but not what you bought. Run business spending through a dedicated business account so nothing gets missed or mixed. Our guides on CRA record-keeping rules and common bookkeeping mistakes cover the systems that make this automatic. If sorting deductible from non-deductible every month is not how you want to spend your evenings, our fixed-fee plans put a CPA-led team on it instead.
Frequently Asked Questions
Can I deduct clothing I bought for work?
Generally, no. The CRA treats ordinary clothing as a personal expense, even if you bought it specifically for client meetings and never wear it on weekends. A realtor's blazers and a consultant's suits are personal. The exceptions are protective clothing and safety gear the work requires, such as steel-toed boots on a job site. Branded uniforms that identify your business are also treated differently from everyday clothes. When in doubt, ask before you claim, because clothing is an easy target in a review.
Does the 50% meal limit apply to the tip and the tax?
Yes. The 50% limit applies to the total amount you pay, including GST/HST and gratuities, not just the food line on the receipt. It also covers meals while travelling for business and meals at conventions. The main exceptions: businesses that sell food or entertainment for compensation, meal costs you rebill to a client and itemize on the invoice, and staff events open to all employees at a location, limited to six events per year.
Can I deduct golf with clients?
Membership dues and fees at clubs whose main purpose is dining, recreational or sporting facilities are specifically non-deductible under the Income Tax Act, and the CRA applies this even when the outing is purely to entertain clients. Green fees fall under the same block. Food and beverages you buy at the clubhouse, however, can still qualify under the normal 50% meal rule, so ask for a separate receipt for the meal portion and keep it with your records.
What if my home office expenses are more than my business income?
You cannot use business-use-of-home expenses to create or increase a business loss. Your claim in any year is capped at your net business income before those expenses. The good news is that the unused amount is not wasted: it carries forward, and you can deduct it in a future year against business income, provided you still meet the eligibility conditions. This comes up often in a first year of self-employment, when income is low and home costs are high.
How long do I need to keep receipts and records?
Six years from the end of the last tax year they relate to, which in practice means a receipt from your 2026 return needs to be kept until the end of 2032. Some records tied to long-term property or the wind-up of a business must be kept longer, and the CRA can require an extended period in specific cases. Electronic copies are fine as long as they are complete and readable, so scanning receipts into your bookkeeping software as you go is the easiest system.
Not sure whether a specific expense passes the CRA's test? Book a free 30-minute consultation with SNF Accounting. We will review your expense categories, flag anything risky, and show you how our fixed pricing from $199 per month keeps your books clean and your deductions defensible all year.