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Business deductions in Canada come down to one test: a reasonable expense you paid to earn business income. The CRA lets you deduct that kind of current expense in the year you incur it. Big purchases that last years are treated differently, and personal spending never counts, whatever you put through the business account.
What counts as a deductible business expense?
Ask two questions. Did the money go toward earning income? Is the amount reasonable for what you got? If the answer to both is yes, the expense is a candidate for a claim, and if you can’t say yes to either one, leave it out. If part of a cost is personal, you claim only the business part.
The CRA’s business expense pages name several common items. Rent and leases for property or equipment, salaries and wages, and convention costs (up to two conventions a year) are on the list. So are the business share of a cell phone and the cost of running a home office or a vehicle, though those two have their own rules and forms. We’re not going to list every line on the T2125 here, only the ones that trip people up.
Which purchases are capital, not current?
Buy a laptop or a delivery van and you can’t deduct the whole price as an expense. The CRA says you can’t claim the cost of capital property that way. You claim capital cost allowance (CCA) instead, which spreads the deduction over the years you use the asset.
We didn’t confirm the CCA rates for each class, so we don’t quote them. Look them up on the CRA’s page for your asset before you plan around a number. What matters here is the line between the two: paying to fix a machine is usually a current expense, while paying for a new one is capital.
How much of a business meal can you deduct?
Half. That’s the rule. The limit is 50% of the lesser of what you actually spent and what’s reasonable. A $2,000 year of client lunches gives you $1,000 to claim.
| Case | Limit |
|---|---|
| Ordinary business meals and entertainment | 50% |
| Meals you bill directly to a client | No 50% limit |
| Employee office parties, up to six a year | No 50% limit |
| Registered charity fundraising events | No 50% limit |
| Long-haul truck drivers on eligible trips | 80% |
The full list has a few more exceptions, such as restaurants and hotels that provide meals as their business.
What is a deduction actually worth?
Less than the dollar you spent, which surprises people. A deduction lowers your profit, and you save tax only at your own rate. We used the self-employed tax calculator for an Ontario sole proprietor with $60,000 of net business income. It shows $7,879.42 in income tax and $6,723.50 in CPP. Take $1,000 off the profit, as those meal costs would, and the figures fall to $7,673.44 and $6,604.50.
That’s about $206 less income tax and $119 less CPP for $2,000 spent. That’s a real saving, worth having, and it repeats every year you keep spending that way. It just isn’t a discount on the lunch, and no business should spend money only to get the deduction.
For a business run through a corporation, the maths is different and the tax rate isn’t the personal one. The corporate tax calculator handles that side, and we haven’t gone into corporate deduction rules here.
What do business owners get wrong?
Three mistakes come up again and again. Claiming GST/HST twice is one: when you claim input tax credits, the CRA says to reduce the expense by the credit amount. Check the tax on an invoice with the GST/HST calculator before you record it.
Another is claiming the whole bill for something you also use at home. Only the business part is deductible. A third is paying a family member without proof. The CRA expects cancelled cheques for salaries paid to a spouse or child, and logbooks for mileage or hours.
Pricing matters too. If your margins are thin, a deduction won’t rescue them, and the profit margin calculator shows where you stand before you start hunting for write-offs.
Keep the receipts, and keep them a long time, because the CRA’s usual six-year rule for records applies to every one of these claims.
Where do the numbers come from?
The rules on current versus capital expenses, the 50% meal limit and its exceptions, and the record requirements come from the Canada Revenue Agency’s business expense pages for sole proprietors. The example figures come from our own calculator, which uses 2026 federal and Ontario tax data and CPP. Deduction rules change, and this page isn’t advice on a specific claim.
Frequently asked questions
What makes a business expense deductible?
The CRA says it must be a reasonable current expense incurred to earn income. Only the business part of a mixed cost counts.
Can I deduct the full price of a computer or vehicle?
No. The CRA treats those as capital property, so you claim capital cost allowance instead.
How much of a business meal can I deduct?
Generally 50% of the lesser of the amount spent and a reasonable amount. There are exceptions, such as meals billed directly to a client.
Do I reduce an expense if I claim GST/HST credits?
Yes. The CRA says to reduce the reported expense by the input tax credit you claim.
What proof do I need for family salaries?
The CRA points to cancelled cheques for salaries paid to a spouse or child, and logbooks for mileage or hours worked.
- 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
Information only. This page is general information, not tax, legal or accounting advice. Tax-Services.ca is an independent publisher: we don't prepare or file tax returns or offer tax services, and we have no connection with the CRA, Revenu Québec, any government or any company named on this page. Check the figures that matter with an official source or a qualified professional.