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You can deduct a business expense if it is a reasonable, current cost of earning income and you can back it up. Only the business part counts. On $100,000 of income, $20,000 of valid expenses cuts an Ontario sole proprietor’s tax and CPP bill by $6,211.40.
What counts as a deductible business expense?
The CRA’s rule is short. You can deduct any reasonable current expense you incur to earn income, and it has to fall in a period when the business is running. That’s the whole test, and everything else is detail.
Personal costs don’t pass it. If something serves both your household and your business, you enter only the business part. A phone you use half for work is a half claim.
Sole proprietors report all this on form T2125, the statement of business or professional activities, which goes in with the personal return. Run two separate activities and you file a form for each. The CRA’s line 8523 page on meals and entertainment is a good example of how specific those line-by-line instructions get.
Which rules trip people up most?
Meals top the list. This table covers the rules we could confirm on CRA pages.
| Item | What the CRA says |
|---|---|
| Meals and entertainment (line 8523) | Claim 50% of the lesser of what you spent and a reasonable amount |
| Mixed personal and business costs | Enter only the business part |
| GST/HST you claimed back | Reduce the expense by the input tax credits you claimed |
| Records | Keep them six years from the end of the last tax year they relate to |
There are exceptions to the meals limit, and one of them gives long-haul truck drivers 80%. Check the CRA’s line 8523 page if your case is unusual.
The GST/HST point confuses new owners. Say you pay $113 for supplies, and $13 of that is HST you’ll claim back as an input tax credit. Your expense is $100, not $113, because you’re not out the $13.
What does a claim actually save you?
Here’s a case from the self-employed tax calculator. An Ontario consultant bills $100,000 in 2026 and has $20,000 of valid expenses.
| Net business income | Income tax | CPP, both halves | Total |
|---|---|---|---|
| $100,000 (no expenses) | $19,044.97 | $9,292.90 | $28,337.87 |
| $80,000 (after $20,000) | $13,233.57 | $8,892.90 | $22,126.47 |
The gap is $6,211.40, about 31 cents on each expense dollar. The calculator leaves out EI and GST/HST, so this shows the income tax and CPP effect only.
Now take meals. If you spend $2,000 on client lunches, only $1,000 is deductible. At this income that trims about $353 off the bill, not the $706 people expect.
Expenses also show you how the business is doing. Keep $20,000 of costs against $100,000 of sales and your margin is 80% before tax, a figure the profit margin calculator gives you for any pair of numbers. Watch it month to month, since a margin that slips usually means a cost crept up.
Worth a look every month.
What should you never claim?
Anything you can’t tie to the business. Groceries, your own commute, gym fees, a family trip with one meeting in the middle. If the CRA asks about a line, you’ll need to show what it was and why the business needed it.
So keep the receipt, the invoice or contract, and a one-line note on the purpose while it’s fresh, because in three years you won’t remember why you bought that subscription or who you took to lunch on a Tuesday.
Big purchases work differently too. Equipment and vehicles usually go through capital cost allowance instead of a one-time deduction. We haven’t confirmed the class rates, so read the CRA’s guide before you buy something large near year end.
Instalments are the last catch. A bigger profit can trigger them, and the tax instalments calculator shows the payments. If you sell with tax added on, the GST/HST calculator splits the tax from the price.
What does a good record habit look like?
Think of Aisha, a freelance designer in Saskatoon. Every Friday she spends ten minutes photographing the week’s receipts into a folder named for the month, and she types one line beside each: “client coffee, Dev, logo review”. It costs her nothing but a coffee break.
At tax time her bookkeeping is done. No shoebox, no guessing, and if the CRA ever asks about a line, the answer is already sitting there. A small habit like that is worth more than any clever deduction.
Can you deduct a cost from before you started?
Often not, at least not as an ordinary expense. The CRA’s test is a current expense incurred to earn income in a period when the business is running, so a cost from months before your first sale doesn’t automatically fit. We haven’t confirmed how start-up costs are treated, so look at the CRA’s expenses pages before you claim them.
Where this information comes from
The rules above come from the CRA‘s pages on business expenses, line 8523 and record keeping. The 50% meals rule and the 80% long-haul trucker exception were checked on the CRA’s line 8523 page. The tax amounts are estimates from our own calculators using 2026 Ontario and federal rates, with one business and no other income. This site isn’t affiliated with the CRA or any government.
Frequently asked questions
What is a deductible business expense?
A reasonable, current cost you incur to earn income, in a period when the business is operating, with records to support it.
How much of a business meal can I deduct?
Generally 50% of the lesser of what you spent and a reasonable amount. The CRA lists some exceptions on its line 8523 page.
How long should I keep receipts?
Six years from the end of the last tax year they relate to.
Do I subtract GST/HST from an expense?
If you claim the tax back as an input tax credit, yes. Your expense is then the net cost.
Where do sole proprietors report expenses?
On form T2125, which goes in with the personal income tax return.
- Self-employed taxes in Canada: income, CPP and GST
How tax works when you are self-employed in Canada: reporting income and expenses, paying both halves of CPP, instalments and when to register for GST