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Sole proprietorship tax deductions are the business expenses you subtract from income on Form T2125 before the net profit reaches your personal return. Every $5,000 of legitimate expenses cuts roughly $1,768 from an Ontario owner’s tax and CPP bill at $65,000 of income, so this is where careful record keeping pays.
Which expenses can you actually deduct?
The rule from the CRA is short. You can deduct reasonable costs you paid to earn business income, as long as they’re current costs and not the purchase of a long-lasting asset. Personal spending stays out. When something serves both purposes, you claim only the business part.
| Type of cost | How it’s treated |
|---|---|
| Advertising, licences, professional dues | Deductible in full |
| Accounting and legal fees | Deductible in full |
| Office supplies, phone, utilities for the business | Deductible, business part only |
| Insurance for the business | Deductible (life insurance is generally not) |
| Repairs and maintenance | Deductible in full |
| Meals and entertainment | 50% of the lesser of actual or reasonable cost |
| Computer, equipment, furniture | Capital cost allowance over several years |
| Your own groceries, clothing, commute | Personal, not deductible |
What is a $5,000 expense really worth?
Take an Ontario owner whose profit would be $65,000 before a $5,000 purchase of business supplies. Our self-employed tax calculator puts income tax at $9,052.50 and CPP at $7,318.50 on $65,000. With the expense claimed, profit drops to $60,000, tax falls to $7,879.42 and CPP to $6,723.50.
That’s $1,173.08 less income tax and $595.00 less CPP, or $1,768.08 in all. You still spent $5,000, so the net cost of the supplies is about $3,232. A deduction doesn’t make a purchase free. People buy things they don’t need for the “write-off” and pay for it twice.
How do meals and the home office work?
Meals are the simple one. If you spend $2,000 on business meals, you deduct at most $1,000.
The home office takes more care. The CRA allows a workspace at home if it’s your main place of business, or if you use it only for earning business income and meet clients there regularly. Then it splits the cost. For a room you also use for living, you work out the hours of business use in a day, divide by 24 and apply that share to the business part of your home costs. Rent or mortgage interest, utilities and property tax all feed into it.
Most people over-claim here. Keep a log of the hours and the bills behind the figure. If the claim would push your business into a loss, remember that the home office part can’t create one, so the unused amount waits for a year with enough profit.
What about the car you use for the business?
If the same vehicle takes you to clients and to the grocery store, only the business share of the costs counts. The CRA’s motor vehicle expenses page asks you to keep a record of the total kilometres you drive and the kilometres you drive to earn income.
Take Chen, who runs a small flooring business in Burnaby. He drives 20,000 km in the year, and 15,000 of those are to job sites. That’s 75%. With $8,000 of fuel, insurance and repairs, he claims $6,000, and the other $2,000 is simply his own driving. The figures are made up, but the method is the one to follow.
Do deductions change your CPP?
That depends on the kind. Business expenses lower your net profit, and CPP is worked out on that profit, so it drops too. Other deductions, like an RRSP contribution, lower income tax only.
A $3,000 RRSP deduction on $60,000 of profit in Ontario cuts income tax from $7,879.42 to $7,218.45, a saving of $660.97, and leaves CPP at $6,723.50. The RRSP calculator shows how that money grows. The tax credits calculator covers the federal credits, which are a separate thing from deductions.
What mistakes cost owners money?
Missing receipts come first. The CRA expects you to back up what you claim. The CRA’s page on where to keep your records and for how long says you must keep all required records and supporting documents for six years, so don’t bin anything sooner.
Second, claiming a computer or a tool in one year. That’s a capital cost, and it’s written off over several years through capital cost allowance.
Third, the personal slip-in: a family dinner, a phone plan used mostly for the family. The business part is deductible and the rest isn’t, so split it on paper.
Last, forgetting the other side. If your income is steady, instalments may apply, which you can size with the tax instalments calculator. For the bigger picture of how the business is taxed, read how sole proprietorship taxes work.
Sources, and how we checked them
The expense rules come from the Canada Revenue Agency‘s business expenses page and its guide T4002, read on September 30, 2026, with the business expenses, motor vehicle and business-use-of-home pages checked again in November 2026. The CRA’s motor vehicle page shows figures for the 2025 fiscal period. Tax and CPP figures come from our calculator’s 2026 data for Ontario, so they’re estimates. The calculator leaves out EI and GST/HST. No level of government runs or endorses this site.
Frequently asked questions
What form do I use to claim business expenses?
Form T2125, Statement of Business or Professional Activities. You list your income and expenses on it, and the net result goes on your personal return. A sole proprietor has no separate business return, so the profit is taxed with your other income and your CPP is worked out on the same net profit.
Can I deduct all my meals as a sole proprietor?
No. The CRA limits meals and entertainment to 50% of the lesser of the actual cost or a reasonable amount. If you spend $2,000 on business meals, you deduct at most $1,000. There are exceptions, such as meals you bill to a client and show on the bill, and businesses that sell food.
Can I deduct part of my home as a sole proprietor?
Yes, if the workspace is your principal place of business, or you use it only for business and meet clients there regularly. You claim the business share of costs such as utilities, property tax, insurance and mortgage interest. The CRA says the claim cannot create or increase a business loss, and unused amounts carry forward.
Are equipment purchases deductible right away?
Usually not. A computer, tools or furniture are capital property, so you claim capital cost allowance over several years instead of the full price at once. Small items you use up, such as pens and stamps, are supplies deducted in the year you buy them. Keep the invoice, since you need it to claim the allowance.
Do business expenses reduce CPP?
Yes, because CPP is worked out on your net business profit, so expenses that lower the profit lower CPP too. In our Ontario example, $5,000 of expenses cut income tax by $1,173.08 and CPP by $595.00. An RRSP deduction lowers income tax only and leaves CPP unchanged.
- 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