Startup Expenses Before First Sale in Canada: Deduct and Record

Can I deduct startup expenses I paid before my first sale?

You can deduct a business expense only if you carried on the business in the fiscal period (your business year) when you incurred it, so the start date matters more than the first sale (CRA: business expenses). Once the business has started, you can usually deduct the expenses you incur to earn income, and may still deduct them if the business ends despite your efforts, so no sale is needed (CRA: T4002, chapter 1). Costs incurred before the start date do not make a business loss, and the price of equipment or other capital property is recovered through capital cost allowance (CCA), the yearly deduction the tax rules allow for that property, not claimed as an expense (CRA: IT-364, archived; Income Tax Act, section 18). The bulletin is archived and no longer updated; the CRA's current business-expenses page repeats its start-date reasoning.

Three things make a case not simple:

• The start date is decided on the facts, case by case, and the CRA says working out what you can claim as a start-up expense can be difficult.
• Spending is often spread across a personal card, a sole proprietorship and a corporation that did not yet exist.
• CRA publications do not clearly say whether a cost paid before the start date can be claimed once the business starts. That is a question for a professional, not a table.

If your launch spend is large and spread across personal cards, a sole proprietorship and a new corporation, or a return is due and the start date is unclear, settle those points with a professional before the books are final.

Gather dated invoices, proof of who paid and from which account, the dates of your first contract, first purchase of stock or equipment and first sale, and the date each asset arrived and was first used.

When does my business start for tax purposes?

A business starts when you begin a significant activity that is a regular part of the business or is needed to get it going, and the CRA decides each case on its own facts (CRA: T4002, chapter 1).

The current guide and the archived bulletin pull in different directions on research: the guide says research into whether to start is not a start, while the bulletin counts extensive surveys aimed at choosing how or where to operate. Where your work falls between the two is a judgment call.

What if I was only researching or planning?

The CRA says you cannot deduct the cost of research into starting a business (CRA: T4002, chapter 1). The archived bulletin adds that costs incurred before the business starts are not a business loss or a non-capital loss (a business loss carried to other years), so they cannot be carried back or forward (IT-364). Keep the receipts anyway: they show when planning ended and operating began.

Planning can be the start. The bulletin gives cases where the start came early: a business that needed a licence commenced when steps were taken in a positive way to obtain it, and a corporation commenced when it undertook preliminary studies and negotiations, even though the project was later abandoned and earned nothing. After the start, expenses incurred to earn income are normally deductible in the year incurred, even if the business is wound up before normal operations begin (IT-364).

Could the CRA treat this as a hobby instead of a business?

Once the business has started, the CRA still asks whether it is run in pursuit of profit. Its audit manual weighs your past profit and loss record, your training, your plan and whether the venture is capitalized to show a profit. Poor business decisions alone do not rule out a source of income, but an activity undertaken primarily to generate tax losses rather than profits may not be one (CRA: audit manual, chapter 27).

Which pre-launch costs are expenses and which are capital?

After the business has started, a cost of running it is a current expense, while the price of property that lasts is capital. The Act denies a deduction for a capital outlay unless it expressly permits one, and CCA is the permission (Income Tax Act, section 18(1)(b); section 20(1)(a)).

How do I record these costs in my books?

Record each cost in the period you incur it, whether or not it is paid yet, and record the payment with who paid and from which account, even while the start date is undecided. Most self-employed people must use the accrual method, which deducts expenses in the period incurred (CRA: T4002, chapter 1). The CRA does not require a particular system; it requires records that support each claim (CRA: business records). The goal is that each cost can later be sorted into an expense, a capital asset, inventory or a cost from before the start.

• Equipment: record it as an asset, with its purchase, delivery and first-use dates.
• Stock to resell: record it as inventory, not an expense.
• Costs from before the start date: keep them dated and apart from ordinary expenses until the start date is settled. A payment ahead of time for rent or services after the start is a prepaid expense, claimed in the period you get the benefit (CRA: business expenses).
• Costs on a personal card: record who paid and from which account, so repayment can be traced later.
• Personal use and GST/HST: record the business share of each cost and any input tax credit claimed. Enter only the business part, and reduce the expense, or an asset's capital cost, by the credit (CRA: business expenses; T4002, chapter 4).

For the books from day one, see setting up books for a new business, and for a corporation books for a new CCPC.

Can I claim capital cost allowance before I have income?

CCA does not wait for your first sale. It is a deduction in computing income from a business, so the business must have started (Income Tax Act, section 20(1)(a)). The property must also be available for use: the Act lets no amount into the class balance before that time (section 13(26)).

Property other than a building is available for use at the earliest of these times, among others (section 13(27)):

• the time you first use it to earn income;
• the time it is delivered to you and can be used to produce a commercially saleable product or perform a commercially saleable service;
• the start of the first tax year that begins more than 357 days after the end of the year you acquired it.

The archived bulletin takes the view that an asset bought before the business starts and later used in it, and not used for some other purpose in the meantime, has the capital cost it would have had if the business had been operating when it was bought. If you used the asset personally first, the Act sets its capital cost when business use begins at no more than its market value then (section 13(7)), so keep its cost, its market value on that date and its use history. If the business never starts, the ordinary capital gain and loss rules apply when you dispose of the asset (IT-364). The bulletin is no longer updated, so confirm this before relying on it.

A CCA claim is optional, from zero to the maximum for the year, and is prorated when your fiscal period is shorter than 365 days, which can happen in your first year (CRA: T4002, chapter 4). Ordinary CCA on business equipment can create or increase a business loss, because it is deducted in computing business income (Income Tax Regulations, section 1100(1)). The Regulations tie some claims to income: CCA on rental property or leasing property (1100(11) and (15)), and immediate expensing for a person who is not a CCPC. Whether to claim is your choice; the CRA says that if you owe no income tax for the year you may not want to claim CCA. For classes, rates and first-year rules, which are changing, see capital cost allowance and buying equipment before year-end.

How many years can I carry a business loss, and against what?

A real business loss that is not used in the year it arises can be a non-capital loss, carried back 3 tax years and forward 20 tax years (Income Tax Act, section 111(1)(a); CRA: line 25200). Costs from before the start date are not part of that loss.

• Sole proprietor: the loss first reduces your other income for the year; only the amount left over can be a non-capital loss (CRA: T4002, chapter 5).
• Corporation: the loss stays in the corporation and is tracked on Schedule 4 against the corporation's own income in other years (CRA: Schedule 4). A new corporation's first year has no earlier year, so its loss can only go forward. If control of the corporation is acquired (a loss restriction event, for example a new majority investor), earlier non-capital losses can be used only against income of the same business (section 111(5)).

For how to claim a carryback and what limits apply, see business losses.

Is it different on a sole proprietor's T2125 than on a corporation's T2?

The start-date and capital rules come from the same Act provisions for both. What differs is the form, and who can use a loss.

Line numbers are from the 2025 form; check them against the current form. To compare the two for a new business, see sole proprietorship or corporation.

Does a new corporation with no sales still file a T2?

Yes. A resident corporation files a T2 for every tax year, even if no tax is payable, and inactive corporations are included (CRA: who has to file). The return is due six months after the tax year ends (CRA: T2 guide).

Filing is also how a first-year loss is recorded on Schedule 4 for later years. If earlier T2s were never filed, see a dormant corporation that never filed.

I paid before I incorporated: whose cost is it?

The CRA's archived bulletin treats costs from before a corporation existed as not the corporation's, with two ways in (CRA: IT-454, archived):

• Company law: the Canada Business Corporations Act and some provincial statutes let a corporation adopt a written contract made in its name before it existed. Until it does, the person who signed is personally bound by it (CBCA section 14).
• CRA acceptance: where no such law applies, the CRA says it will normally accept the corporation's accounting if the people who authorized the costs clearly meant a corporation to carry on the business, the delay was short or not their doing, nobody disputes who accounts, the effect on their combined tax is negligible and the corporation adopts the written contracts.

The bulletin warns not to assume acceptance. It will not accept the corporation's accounting when a sole proprietor or partners incorporate an existing business, unless the business was newly acquired; see books after incorporating a sole proprietorship.

Equipment you already own and put into the corporation is a separate transfer: it is a sale at market value unless you and the corporation jointly elect under section 85, no later than the earliest return filing date of either of you (Income Tax Act, section 85; see moving a business into a corporation).

The start-date rule still applies: a cost paid before the business started does not make a business loss, for you or for the corporation. The card alone may not decide whose cost it is; who the invoice names and the dates matter, and the facts of your case decide the rest. For incorporation fees and pre-incorporation costs, see incorporation costs. For repaying yourself, see business expenses paid personally.

Does my province change the answer?

The rules above are federal: the start date, the expense or capital split, CCA and the loss years come from the federal Income Tax Act. A corporation reports provincial and territorial tax on the same T2, except that a corporation located in Quebec or Alberta also files a separate provincial corporate return (CRA: T2 return). Revenu Québec administers Quebec's provincial income tax, and this guide does not cover it; a Quebec filer should not assume the rules match.

GST/HST and provincial sales tax on startup purchases do differ by province; see claiming GST/HST paid before registering.

What do I keep to prove the start date and the costs?

The law requires you to keep records of all your transactions to support income and expense claims, generally for a minimum of six years from the end of the last tax year they relate to (CRA: business records). A corporation keeps its ledger, share records, minutes and the contracts needed to understand the ledger until two years after it is dissolved (Income Tax Regulations, section 5800; see how long to keep business records). The CRA says to keep separate records for each business (CRA: T4002, chapter 1).

Example

All amounts are Canadian dollars and illustrative.

Research first, equipment second

A Vancouver freelancer pays C$500 for market-research courses in March and buys a C$2,400 laptop in May. The first client pays in July. Assume the laptop is used only for the business and C$2,400 is its cost after any GST/HST credit. If the courses are research on how to start, the CRA does not count them as the start of a business and says their cost cannot be deducted. If the laptop was bought to begin operating, the business started in May. The laptop is capital: its C$2,400 goes into CCA once it is available for use, not when the client pays, and the claim may be prorated for the short first period. Later running costs, such as advertising and supplies, are current expenses.

Stock and rent before the first sale

A Hamilton corporation pays C$6,000 rent and buys C$14,000 of stock to resell, and has made no sale by its year-end. Assume the rent covers only the period to that year-end, and that the stock came first and was enough to begin marketing. If that starts the business, the rent that follows may be a current expense. The stock, valued here at cost, is closing inventory, not a cost.

• Year 1: on that assumption, a loss of C$6,000, before any other costs. It has no earlier year to go back to, so it carries forward. The corporation still files a T2.
• Year 2: income of C$15,000 before the loss. Applying the C$6,000 loss leaves taxable income of C$9,000.

Setup costs before incorporating

A founder puts C$3,000 of setup costs on a personal card in January and incorporates in March. The corporation did not exist in January, so it cannot simply account for those costs. Whether the business had started, whether the CRA would accept the corporation's accounting for them and how the corporation repays her are settled and documented before the first T2 is filed.

Different for you?

• Your launch spend is large and spread across personal cards, a sole proprietorship and a new corporation, or your first return is due and the start date is unclear: the start date, the expense or capital split, who owns each cost and how a start-up loss carries are professional-judgment questions. Get bookkeeping help to settle them before the books or the return are final, with your dated invoices and first-contract dates in hand.
• You paid before incorporating, or paid incorporation fees: see incorporation costs.
• You ran the business as a sole proprietor and then incorporated it: see books after incorporating a sole proprietorship.
• You paid on a personal card and want to be repaid: see business expenses paid personally.
• You paid GST/HST before registering: see claiming GST/HST paid before registering.
• You are unsure whether a cost is allowed at all: see business expenses the CRA accepts.
• Your corporation never filed a T2: see a dormant corporation that never filed.