Every week, a business owner sits across from one of our accountants, slides a receipt across the desk, and asks the same question: “Can I write this off?”
It sounds like a simple question. It rarely is. The answer depends on what you bought, why you bought it, how you use it, and whether you can prove all three. The good news is that the underlying rule is short enough to memorize, and once you understand it, most expense decisions become straightforward.
A note about business structure before we start. Most of the examples below draw on the CRA’s Form T2125 rules, which apply to sole proprietors and partnerships reporting business income on a personal return. Incorporated businesses follow many of the same general principles for deciding whether an expense is deductible, but corporations report through a T2 corporate return and some rules differ. Where the difference matters, we say so.
The Basic Rule for Business Expenses
The Canada Revenue Agency allows you to deduct any reasonable current expense you incur to earn business income. For current expenses, that single sentence, drawn from the rules behind Form T2125 on Canada.ca, does most of the work. Break it into its three parts and you have a test you can apply to most everyday purchases:
- Reasonable. The amount fits the size and nature of your business. A $400 client dinner might be reasonable for a firm closing a six-figure contract. It looks different on the return of a part-time sole proprietor.
- Incurred. You actually paid it, or are legally obligated to pay it, and you have the paperwork to show for it.
- To earn business income. You made the purchase for a legitimate business purpose related to earning business income rather than for personal use. The expense does not need to trace to a specific sale. Insurance, accounting software, and administrative costs all count, because a business cannot earn income without them.
If a purchase passes all three parts, it is very likely deductible. If it fails even one, claiming it invites a reassessment. Capital purchases follow a separate set of rules, which we cover below. We also walked through the thinking behind borderline purchases in our earlier post, Can I Expense This?, and the test above is the engine behind every answer in it.
Common Business Expenses You Can Deduct
Most legitimate business costs fall into a predictable set of categories. Here are the ones that appear on nearly every return we prepare:
Advertising and marketing. Online advertising, Canadian media advertising, signage, promotional materials, and other reasonable marketing costs are generally deductible. Special restrictions apply to some advertising in periodicals and to advertising directed at Canadians through foreign broadcasters. Routine website costs such as hosting, maintenance, and subscriptions fit here as well, though a major website build can be treated as a capital cost depending on the facts.
Office expenses and supplies. Paper, software subscriptions, postage, and the everyday consumables of running your operation.
Rent and utilities. Rent on commercial space used for the business is generally deductible, along with the business portion of power, heat, internet, and phone service.
Salaries, wages, and subcontractors. Wages and eligible benefits paid to employees, along with qualifying contractor costs, are generally deductible. One exception catches new owners off guard: a sole proprietor cannot deduct their own salary or drawings. Corporations follow different rules when paying shareholder-employees, and the employee-versus-contractor distinction carries its own tax consequences either way.
Professional fees. Accounting, bookkeeping, and legal fees paid to run the business qualify. Yes, the fee for preparing your business tax return is itself a write-off. One nuance: legal fees tied to buying capital property, such as a building, are usually added to the property’s capital cost rather than deducted right away.
Vehicle expenses. Fuel, insurance, repairs, and lease costs are deductible in proportion to business use, supported by vehicle records such as a mileage log. The details matter enough that we wrote a full guide on how to write off your car for business.
Meals and entertainment. Generally limited to 50 percent of the lesser of the amount incurred and an amount that is reasonable in the circumstances, even when the meal is entirely business related. Some exceptions exist, such as certain staff events.
Home office. For a self-employed person, business-use-of-home expenses may be deductible if the workspace is your principal place of business, or if you use the space only to earn business income and regularly and continuously meet clients, customers, or patients there. Eligible costs include a reasonable business share of rent, or of mortgage interest, utilities, home insurance, and property taxes. One limit to know: these expenses cannot be used to create or increase a business loss, though unused amounts can generally be carried forward.
Interest and bank charges. Interest on money borrowed for business purposes, business account fees, and payment processing charges are generally deductible, subject to specific limits such as the cap on passenger-vehicle financing costs.
What About Big Purchases Like Equipment and Vehicles?
Here is where owners most often trip. A $3,000 computer is a business cost, but it is generally a capital asset rather than a current expense, because it delivers value over several years. Capital assets are deducted through capital cost allowance, or CCA, and how much you can claim in the first year depends on the asset class and on when the property was acquired and became available for use.
The timing rules matter more than most owners realize. Under current CRA guidance, qualifying new Class 50 computer equipment acquired after April 15, 2024 and available for use before 2027 may qualify for a 100 percent first-year CCA deduction, which means that $3,000 computer could be fully written off in year one. Vehicles, machinery, buildings, and furniture sit in their own CCA classes with their own rates and limits, and several accelerated first-year provisions have come and gone in recent years. Before assuming a big purchase must be spread over a decade, or assuming it can all be claimed at once, check the class and the acquisition date, or ask us to.
Expenses the CRA Commonly Rejects
Knowing what does not qualify saves more grief than knowing what does. The recurring offenders:
- Personal costs dressed up as business costs, including everyday clothing, commuting between home and work, and family meals
- The full price of a mixed-use item when only a portion relates to the business
- Most fines and penalties imposed under Canadian, provincial, or foreign law, including ordinary parking and speeding tickets earned on business trips
- Life insurance premiums in most situations, with limited exceptions such as policies assigned as collateral for qualifying business loans
- Expenses with no receipt, invoice, or other supporting record behind them
That last point deserves its own section, because documentation is where good claims go to die.
No Records, No Write-Off
The CRA does not have to take your word for anything. Under its record-keeping rules, published in guide RC188 on Canada.ca, you must keep supporting documents for six years from the end of the tax year they relate to. Receipts are the most common form of support, but invoices, purchase agreements, and other vouchers count too. What does not count is nothing at all: an expense with no record behind it can simply be denied.
Treat record keeping as a system rather than a scramble. Owners who photograph receipts the day they get them almost never lose a deduction. Owners who plan to sort a shoebox in April almost always do. Tools help here. We walk through one option in Digitizing Documents with Dext, and if the whole area feels shaky, start with why bookkeeping is essential and our plain-language breakdown of bookkeeping categories.
The consequences of getting this wrong compound. A denied expense means more tax owing, plus interest, and sometimes penalties on top. We explain how those charges stack up in Avoiding CRA Penalties and Interest.
Frequently Asked Questions About Business Write-Offs
Can I write off my cell phone? The business-use portion of the monthly service cost, yes. If a reasonable, supportable allocation shows that 70 percent of your phone use relates to the business, you would generally claim 70 percent of the bill. The purchase of an expensive phone or device is a separate question, since it may be capital property claimed through CCA rather than expensed outright.
Can I write off clothing? Specialized protective clothing, such as steel-toe boots or safety gear, may qualify, and so may a genuine distinctive uniform. Ordinary clothing that could reasonably be worn outside work, such as a suit or everyday shoes, generally stays a personal expense even if you bought it for client meetings, and adding a logo does not automatically change that.
Can I deduct expenses if my business lost money? Yes. Legitimate expenses remain deductible even when the business is not profitable. For a sole proprietor, a genuine business loss may reduce income from other sources, and a resulting non-capital loss can generally be carried back three years or forward up to twenty years. Losses inside an incorporated business work differently: they generally stay within the corporation and do not simply reduce the shareholder’s personal income. Repeated losses do not by themselves make expenses non-deductible, but they raise the stakes on being able to show the activity is genuinely commercial and carried on with an intention to earn a profit.
How much can I claim without receipts? Practically speaking, nothing you would want to defend. A missing receipt does not always make an expense impossible to support. An invoice, a bank or credit card record, an expense journal entry noting the supplier, date, amount, and purpose, and other documentation may together establish what was purchased, when, from whom, and for how much. But no single bank line proves a business purpose on its own, and a claim with no supporting documentation behind it is a claim you should expect to lose. The Business Development Bank of Canada’s guide to tax-deductible expenses makes the same point we make to clients: the deduction is only as strong as the paper behind it.
When to Bring In a Professional
A missed deduction costs you money. An aggressive one costs you more. The owners who come out ahead are the ones with a system: expenses categorized as they happen, receipts stored the day they arrive, and a professional reviewing the grey areas before the return is filed rather than after the CRA asks questions.
That review is what we do. McNabb Lucuk LLP has worked with Grande Prairie and Peace Country businesses since 2015, from oilfield contractors to retail shops to professional practices, whether they operate as sole proprietors or corporations. If you want a second set of eyes on your expenses before this year’s filing, our bookkeeping and corporate tax teams can help.
Contact us at 780-539-3400 or [email protected] to book a conversation about what your business can, and should, be writing off.