Canada Business Expenses Guide

the deductible business expenses in Canada. The general deduction rule (s. 18(1)(a) of the ITA) — the expense must be incurred "for the purpose of gaining or producing the income from the business" and must be "reasonable in the circumstances." The capital vs operating expenses — the operating expenses (the "current expenses" — the rent, the utilities, the supplies, the advertising) are fully deductible in the year. The capital expenses (the "capital improvements" — the new equipment, the new building, the new vehicle) are capitalized and depreciated through the CCA (the "capital cost allowance") over the useful life. The 50% meal and entertainment — the business meals and the entertainment expenses are deductible at 50% (the "50% rule" — the taxpayer can deduct only 50% of the cost). The interest on the business loans is fully deductible if the loan is used to earn the business income (the "interest deduction" — the interest on the loan for the business property). The business-use-of-home expenses — the proportional share of the home expenses (the mortgage interest, the property taxes, the utilities, the insurance, the maintenance) if the home is the "principal place of business." The vehicle expenses — the "business-use" of the vehicle (the CRA "kilometer log" — the tracking of the business vs the personal kilometers). The business travel — the transportation, the accommodation, and the meals for the business trips (the "travel expenses" — the "reasonable" costs). The SR&ED investment tax credits — the refundable and the non-refundable tax credits for the scientific research and the experimental development.

General Deduction Rules

Purpose test: The expense must be incurred for the purpose of gaining or producing the business income. The CRA considers the "primary purpose" of the expense — the "intention to earn the income."
Reasonableness test: The expense must be "reasonable in the circumstances" — the CRA considers the nature of the business, the amount of the expense, and the industry standards. The expense that is "excessive" (the "unreasonable compensation" — the salary to the family member that exceeds the fair market value) may be disallowed.
Capital vs operating: The "enduring benefit" test — the expense that provides the benefit for more than 1 year is the capital expense (the "capital improvement"). The expense that provides the benefit for the current year is the operating expense (the "current expense").
Personal expenses: The personal expenses (the "personal living expenses" — the food, the clothing, the personal travel) are NOT deductible unless they are directly related to the business (the "business purpose" — the business meals at 50%, the business travel).

Meals & Entertainment (50% Rule)

50% deduction: The business meals and the entertainment are deductible at 50% of the cost. The rule applies to the meals with the clients, the business partners, the employees, and the prospective customers.
Exceptions: The 100% deduction is allowed for the meals and the entertainment provided to the employees at the "special events" (the "employee appreciation" — the company picnic, the holiday party, the office party). The 100% deduction also applies to the meals and the entertainment that are the "compensation" (the "taxable benefit" — the meals provided to the employee as the "board and lodging").
Documentation: The taxpayer must keep the receipt with the date, the amount, the name of the restaurant or the venue, the business purpose (the "client meeting" or the "business development"), and the names of the attendees.

Vehicle Expenses

Business vs personal: The CRA requires the "kilometer log" (the "vehicle log" — the record of the business kilometers and the personal kilometers). The business-use percentage is calculated as the business kilometers divided by the total kilometers.
Standard mileage rate: The CRA does NOT offer the standard mileage rate (unlike the IRS). The taxpayer must track the actual expenses — the fuel, the insurance, the maintenance, the repairs, the leasing costs, and the CCA on the vehicle.
Leasing costs: The lease payments are deductible up to the "leasing limit" — the prescribed monthly limit (approximately $800 per month before the tax).
Vehicle CCA: The passenger vehicle CCA is limited to the "capital cost limit" — the maximum cost for the CCA purposes (approximately $35,000 before the tax). The CCA rate is 30% (the declining balance — the Class 10) for the passenger vehicles.

For the home office expenses and the workspace deduction, see our Home Office Expenses Guide →. For the vehicle expenses and the mileage tracking, see our Vehicle Expenses Guide →.