What Can I Deduct as a Business Expense?

At the end of the day you have to ask yourself a simple question: was this expense paid, primarily, in an effort to earn business income? If the answer is yes, it is deductible, if the answer is no, it is not.

In his days as a lawyer traveling the Eighth Judicial Circuit, Abraham Lincoln once asked an adversary in court, “How many legs does a sheep have?” The man replied, “Four, of course,” Lincoln went on to ask “And if you were to call a tail a leg, how many legs then?” The man replied, “Well I suppose then you’d have to say five.” Lincoln smiled and responded, “No. The answer is still four. Calling a tail a leg does not make it so.”

We are often asked by our clients what constitutes a deductible business expense? The answer the Canada Revenue Agency has provided is quite simple: a deductible business expense is any reasonable current expense (cost) you paid or will have to pay to earn business income (revenue).

Personal expenses are specifically excluded, which brings us back to President Lincoln’s parable: calling a personal expense a business expense does not make it so. The CRA has an army of auditors who exist for the sole purpose of disallowing bogus business expenses.

Commonly Audited Personal Expenses

  1. Non business travel expense. Any trip that is predominantly taken for non-business purposes is disallowed. If a trip is for a business related conference or meeting the business portion of the trip would include only airfare and accommodations for the duration of the conference or meeting.
  2. Shareholder / Employee medical expenses. Unless you have set up a private health service plan in your business (i.e. a formal health insurance arrangement funded by the corporation), health expenses paid for shareholders or employees aren’t deductible. The good news is that medical expenses are deductible – in the form of a tax credit – for personal tax purposes after they cross a certain threshold (the lesser of $2,208 or 3% of net income in 2015).
  3. Non business meals. Unless a meal is for the purpose of earning business income, such as taking a client out for dinner, the cost of the meal is not deductible. This means that going for lunch by yourself is not deductible.

Expenses Deductible for Business Purposes

Now that we’ve covered the negative examples, here’s a comprehensive list of the types of expenses that are deductible for business purposes:

This is a long list, and if you follow all the links, you’ll see that properly accounting for your business expenses is, at times, difficult. But not to worry, that’s our job.

What we ask of you is that you simply do not include personal expenses when you send in your Origami Monthly Envelope.

In the past we’ve had clients attempt to deduct personal expenses that span the gamut from engagement rings to haircuts to family vacations for “business brainstorming.” At the end of the day you have to ask yourself a simple question: Would you still try to claim this as a business expense if you knew you were going to get audited?

24 Responses to “What Can I Deduct as a Business Expense?”

March 17, 2014, 3:32 p.m.  –  kris – Reply

Hi there,
I have a question, if you are the owner of a small incorporated company (freelance web designer), and you purchase a new computer, would you claim those expenses under your personal taxes, or the corporation?

Thanks.

March 17, 2014, 3:45 p.m.  –  Kris Sparrow – Reply

Good question Kris.

If your business is incorporated and the computer was purchased for business purposes, it would be recorded as an asset in your corporation. An asset is a type of business cost that provides economic benefit for more than one year as exposed to an expense that provides benefit for one year or less. Tangible assets like computers are depreciated (i.e. expensed) over their economic useful lives. For Canadian tax purposes, computers are depreciated via the capital cost allowance at a rate of 55% per year (with a half year rule allowing for only half of capital cost allowance to be taken in the year of purchase).

Feb. 9, 2015, 11:51 a.m.  –  singh – Reply

If you're incorporated; under the business use of home expenses, are you able to deduct a % of your mortgage interest? Thank you.

April 3, 2015, 9:38 a.m.  –  Kris Sparrow – Reply

My apologies for the belated reply Singh.

Shareholders are able to charge corporations for the business use of their homes. Such a charge would include a percentage of mortgage interest but not principal.

April 27, 2016, 8:16 a.m.  –  Andre – Reply

Would the Shareholder then declare the charge to the business for use of their home as personal income?

April 27, 2016, 9:11 a.m.  –  Kris Sparrow – Reply

Hi Andre,

If a corporation were to claim a home office expense for use of a shareholder's home, then that should be considered personal income of the shareholder.

However, by definition, because the home office expense is based on actual home expenses, the rental expenses associated with the home office would exactly offset the income it generates.

For this reason, in practice, income from a corporately claimed home office expense is rarely reported personally.

Regards,
Kris

March 20, 2014, 3:38 p.m.  –  Jane – Reply

Hi, if we hold meetings in a restaurant, because the meals are like meeting catering costs are they 100% deductible as a meeting expense, or does the CRA consider them meals under the meals and entertainment category at 50%?

March 25, 2014, 9:01 a.m.  –  Kris Sparrow – Reply

Hi Jane,

While the CRA does allow for full deductibility of "meal and entertainment expenses for a Christmas party or similar event, (if) you invite all your employees from a particular location. (note that you are limited to six of these events each year)" and for a few other exceptions you can read about it here ( http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/t2125/ln8523-eng.html ); your example doesn't appear to fit that criteria.

Any amounts paid for meals enjoyed during meetings would be considered meals and entertainment and as such only 50% deductible.

However, if you hold birthday parties or celebrate other occasions at a restaurant - like the end of personal tax season in the case of an accounting office! - and invite all of your staff, six or fewer times in a year, the meal expense would be fully deductible.

April 30, 2015, 11:12 a.m.  –  Alise – Reply

Just wondering what category to place the following expenses:

- online invoicing tool subscription
- domain name cost
- website template
- wireless internet

April 30, 2015, 1:16 p.m.  –  Kris Sparrow – Reply

Hi Alise,

When it comes to classifying expenses items there aren't a lot of wrong answers.

There are a few notable exceptions like meals and entertainment, life insurance, and CRA penalties and interest where the tax treatment of the expense necessitates that it be classified in a specific manner but in the overwhelming amount of cases, it really is a matter of preference.

A couple of the items you listed, namely domain name cost and website template, appear to be more capital (i.e. providing benefit for more than one year) than current in nature; as such, they would be properly recorded as assets rather than expenses.

As for the amounts spent on the online invoicing tool subscription and wireless internet, I think an expense account named computer and internet expenses would work well.

Feb. 23, 2016, 1:45 p.m.  –  Courtney – Reply

Good morning,

Does the advertising expense only include print advertising? What about other advertising costs like online marketing, billboard advertisements, and local sports team sponsorships?

Thanks!

Feb. 25, 2016, 2:21 p.m.  –  Kris Sparrow – Reply

Hi Courtney,

Advertising expense would also include costs like online marketing, billboard advertisements, and local sports team sponsorship.

Essentially any amount spent to promote the business in an effort to generate sales would qualify as advertising expense.

March 11, 2016, 9:25 a.m.  –  Ben Ayres – Reply

Hi:
I live in Ontario, and work from home on Mondays & Fridays. Tuesdays trough Thursdays, I must go to the office in Quebec.
Can I claim my rent in Montreal as a business expense? If so where do I enter it?

Thanks
Ben

March 14, 2016, 10:37 a.m.  –  Kris Sparrow – Reply

Hi Ben,

The answer to that question requires a bit more nuance than we are comfortable putting in a blog reply.

Here's the relevant CRA guidance on "special work sites":

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/brd/spcl/menu-eng.html

March 20, 2016, 9:35 p.m.  –  Dave – Reply

Hi, I have a question if you don't mind. I'm a sole proprietor making $30-$60K, just so you have a point of reference. If I'm using the HST Quick Method to calculate HST remittance, do I include the HST paid in my business expenses? My understanding is that I do include the HST paid in my expenses. I've read that in a couple of different places, but it's vague on the CRA website.
Thanks,
Dave

March 21, 2016, 7:28 a.m.  –  Kris Sparrow – Reply

Hi Dave,

If you're using the Quick Method to calculate your HST remittance, you should include HST paid in your business expenses when preparing your personal tax return.

The HST liability as calculated by the Quick Method should be deducted from sales (there is a line for this on schedule 2125).

Under the Quick Method you are still allowed to claim input tax credits (i.e. HST paid) on asset purchases (i.e. purchases > $500 that will provide economic benefit for more than one year); so HST paid on asset purchases should not be included when entering asset purchases on your personal tax return. That HST should instead be reported on your HST return.

March 21, 2016, 10:42 a.m.  –  Stacey – Reply

I am an electrician and owner (with my partner) of a new corporation. I drive my personal vehicle to sites for work, quotes, pick up material, etc. and have documented my mileage as per CRA's guidelines. We have not taken an income from the corporation this year as we are trying to build up our business. Can I still deduct the mileage on my personal income tax return (ie: employment expenses)?

April 6, 2016, 8:51 a.m.  –  Kris Sparrow – Reply

Hi Stacey,

Given your situation it would be best to deduct the mileage as an expense corporately and reimburse it to yourself, personal, tax free.

Here are the allowable CRA mileage rates for calculating the auto allowance:

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/tmbl/llwnc/rts-eng.html

April 6, 2016, 12:29 a.m.  –  Kay – Reply

Hi,

My husband runs a small business delivering bulk of newspaper everyday. He uses a small space at home with a computer to send emails to his contractor, modifies route list and bookeeping there, too. Can he claim a part of our rent and utilities as home-business expense?

Thank you.

April 6, 2016, 8:54 a.m.  –  Kris Sparrow – Reply

Hi Kay,

It sounds like your husband isn't incorporated. If that is the case the standard for deducting home office expense is quite high.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/cmmssn/hm-eng.html

The two main criteria are:

1) The work space is where you mainly (more than 50% of the time) do your work.
2) You use the workspace only to earn your employment income. You also have to use it on a regular and continuous basis for meeting clients, customers, or other people in the course of your employment duties.

The second (meeting) criteria is what most often trips people up.

April 17, 2016, 1:52 p.m.  –  Jodi – Reply

Hello
Can a shareholder write off clothing expenses if the clothing is used for business attire?

April 18, 2016, 7:25 a.m.  –  Kris Sparrow – Reply

Hi Jodi,

Unless the clothing in question is a company branded uniform, a shareholder cannot write off clothing expenses.

Regards,
Kris

April 24, 2016, 10:29 p.m.  –  Hubert samy – Reply

Hello,

What is normal business expense ratio? What percentage can be a red flag to CRA?

Thank you

Hubert

April 25, 2016, 8:31 a.m.  –  Kris Sparrow – Reply

Hi Hubert,

If such a ratio exists, the CRA has not disclosed it.

As long as the business expenses you claim are actually incurred in the pursuit of business income, with a reasonable expectation of profit, you have nothing to fear from the CRA.

Regards,
Kris

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