Business Expense Deductions
What self-employed Canadians can deduct, what they can't, and the records CRA wants.
The short version
- You can deduct any reasonable expense incurred to earn business income, on form T2125. Personal expenses and capital purchases aren't current deductions.
- Mixed-use costs (vehicle, phone, internet, home) are deductible only for the business share, with records to back the percentage.
- Meals and entertainment are generally 50% deductible.
- Equipment, vehicles and computers go through capital cost allowance (CCA) over several years.
- GST/HST registrants deduct expenses net of the input tax credits they claim.
Business Expense Tax Deductions Canada
The test for a business expense is short: was it reasonable, and did you spend it to earn business income? Most real expenses pass. The trouble is the grey zone: the family SUV, the phone everyone in the house uses, the dinner with a client who's also your brother-in-law. CRA doesn't ban those; it wants the business share and the proof. Here's what counts.
What's Deductible
| Expense | Deductible? | Notes |
|---|---|---|
| Supplies, materials, inventory sold | Yes | Inventory through cost of goods sold |
| Advertising, website, online ads | Yes | Line 8521 |
| Accounting, legal, bookkeeping | Yes | Line 8860; not for personal matters |
| Business insurance | Yes | Liability, equipment, business interruption |
| Phone and internet | Business share | Keep a reasonable basis for the percentage |
| Software, subscriptions, platform fees | Yes | Business use |
| Vehicle | Business share | Logbook required; see vehicle expenses |
| Home office | Business share | Conditions apply; see home office |
| Meals and entertainment | 50% | Clients and business meetings |
| Travel | Yes | Business trips; meals at 50% |
| Wages to employees, including family | Yes, if reasonable | For real work at market pay; see paying your spouse and paying your children |
| Interest on business loans, bank fees | Yes | Business borrowing only |
| Training to maintain or upgrade current skills | Yes | Not training for a new profession |
| Equipment, tools, vehicles, computers | Through CCA | Spread over several years |
What's Not Deductible
- Personal living expenses: groceries, personal clothing, the family vacation.
- Your own wages or draws. A sole proprietor can't pay themselves a deductible salary.
- Fines and penalties, including CRA interest and penalties.
- Club memberships whose main purpose is recreation, dining or sport.
- Commuting from home to a regular workplace that isn't your home office.
- Capital purchases as a one-time expense (they go through CCA).
Is this a deductible business expense?
Describe the expense and your business. The assistant tells you whether it's deductible, how much (full, business share, 50% or CCA), which T2125 line, and what proof to keep.
The Four Records CRA Asks For
- Receipts or invoices showing who was paid, what for, how much and when.
- Proof of payment (bank or card statement).
- A vehicle logbook for any vehicle claim; see the mileage log guide.
- A note on the business purpose for meals, travel and anything that could look personal; see business travel and phone and internet.
Keep everything six years; see what receipts to keep. Where each expense goes on the form is on T2125 explained.
Why It Matters Twice
Every dollar of legitimate expense reduces both income tax and CPP. At $60,000 of profit in Ontario, a missed $1,000 expense costs you roughly $300 to $400. See how much to save for taxes. And if expenses exceed revenue, the result is a business loss that can reduce your other income, provided the activity is a real business and not a hobby.
Get your GST/HST set up right the first time
The GST/HST SmartFile runs both $30,000 tests on your sales, compares the quick method with the regular method, and fills in form GST74 if the quick method wins.
Before filing, Return Check flags expense lines that look high for your industry and claims with a personal element CRA tends to adjust.
Bad Debts
If you report income when you invoice (the accrual method most businesses use), an invoice you can't collect can be deducted as a bad debt in the year you decide it's uncollectible. Keep the collection attempts on file. If the customer later pays, the amount goes back into income. Cash-basis farmers and fishers can't claim bad debts, because the income was never reported. The GST/HST you charged can also be recovered; see GST/HST bad debts.
Business Expense Questions
What business expenses can I deduct in Canada?
Any reasonable expense incurred to earn business income, such as supplies, advertising, professional fees, insurance, the business share of vehicle, phone and home costs, 50% of meals and entertainment, and capital cost allowance on equipment.
Can I deduct my cell phone as a business expense?
Yes, the business-use portion. Keep a reasonable basis for the percentage you claim.
How much of business meals can I deduct?
Generally 50% of the cost of meals and entertainment.
Can I deduct a computer or tools?
Yes, but usually through capital cost allowance over several years rather than all in the year you buy them.
Can I pay myself a salary as a sole proprietor?
No. A sole proprietor's drawings are not a deductible expense; you are taxed on the business profit instead.
Can I deduct a bad debt as a business expense?
Yes, if you included the amount in income when you invoiced it and it has become uncollectible. If the customer pays later, add the amount back to income.
Sources: CRA, Guide T4002, Chapter 3 Expenses; Expenses section of form T2125. Checked October 2026. The savings estimate is approximate.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.