Business expenses in Canada: what the CRA lets you write off

Is this a deductible business expense in Canada?

A cost is deductible only when it passes four tests in the Income Tax Act: it was spent to earn income from the business, it is not a capital outlay, it is not a personal or living expense, and the amount is reasonable in the circumstances (section 67). The CRA's summary: you can deduct any reasonable current expense you incur to earn income, and only the business part of a cost.

What makes a case not simple: a corporation paying costs that benefit an owner, large amounts of mixed personal use, research spending that might be SR&ED, and costs the CRA has already questioned. Gather receipts, a note of each cost's business purpose, attendee names for meals and events, and use logs for anything you also use personally, and keep them for six years from the end of the last tax year they relate to (CRA).

This page covers the federal rules. A Quebec business also files a Quebec return with Revenu Québec, whose rules can differ; check them separately.

Can I deduct the whole cost this year, or is it a capital cost?

A cost that gives a lasting benefit is capital and is not deducted in full in the year it is paid (section 18(1)(b)). A cost that recurs after a short period is current and is deducted in the year.

The CRA weighs several points, including whether the benefit lasts, whether the cost restores a property or improves it beyond its original condition, whether it replaces a part or a separate asset, and how large the cost is next to the property's value. No single point decides it. Equipment, computers, furniture and cameras are usually capital and are written off over several years through capital cost allowance.

How much of a meal, coffee or entertainment bill can I write off?

A business usually deducts 50% of the lesser of what it paid and a reasonable amount for food, drinks and entertainment (section 67.1). The limit covers client meals and coffees, your own meals while travelling or at a convention, and entertainment such as tickets, private boxes, cover charges and tips (CRA; IT-518R, archived). A meal you eat alone on an ordinary workday is generally a personal cost, not a business one (section 18(1)(h)).

The full cost can be deducted when:

• The business sells food, drinks or entertainment to customers in its ordinary course, as a restaurant does.
• The meal is billed to a client at a reasonable amount, specifically identified in writing; the client is then the one limited.
• The event is a fundraiser mainly for a registered charity.
• The food or entertainment is at one of six or fewer special events in a calendar year, generally available to all employees at a particular place of business. A party for only owners, managers or selected staff does not qualify.
• The meal is a taxable benefit included in an employee's income.
• The food or drink is for employees at a remote work site at least 30 kilometres from any population centre of 40,000 or more, or at a construction work camp where they are lodged, and is not for a conference or convention.

A long-haul truck driver's food and drinks during an eligible travel period are deductible at 80% instead (CRA). Meals included in an airplane, train or bus fare are not limited; food bought separately on the trip is (section 67.1(4)). For a meal you reimbursed yourself for, see business expenses paid personally.

Are client gifts tax deductible in Canada?

A gift to a client is deductible when it is given to earn business income and the amount is reasonable (sections 18 and 67). The Act sets no fixed dollar cap per gift. A gift of food, drinks or entertainment, such as wine, event tickets or a restaurant gift certificate, falls under the meals limit of 50% (IT-518R, archived). Keep a note of who received each gift and why.

Can I deduct gift cards and presents for employees?

Yes. An employer deducts gifts to employees as salaries and other benefits (CRA T4002). The question is whether the employee is taxed on the gift.

Under the CRA's policy, non-cash gifts and awards are not taxable to an arm's length employee up to a combined fair market value of $500 a year, including taxes; only the excess is taxable. The policy covers gifts for a special occasion, such as a holiday or a wedding, and awards for an accomplishment such as outstanding service; anything given for job performance, such as meeting a sales target, is a reward and is taxable in full. Long-service awards have their own separate limit. Cash and near-cash gifts are always taxable and go through payroll. A gift card is near-cash unless it works only at one retailer or a named group of retailers, cannot be turned into cash, and the employer keeps a log of it. The policy does not apply to relatives, shareholders or other non-arm's length employees.

Is a sponsorship an advertising expense or a donation?

A payment becomes a sponsorship when the business gets more than a simple thank-you, such as its logo on jerseys, signs or event materials. The charity generally cannot issue a donation receipt for it, but the business may include a reasonable sponsorship cost in advertising if it was made to earn income (CRA sponsorship).

Advertising aimed mainly at a Canadian market and broadcast by a foreign broadcaster is not deductible (section 19.1). Ads aimed at Canada in a foreign newspaper or in some periodicals have Canadian-content limits (section 19; section 19.01); ads on foreign websites do not (CRA).

Can my corporation expense a business coach, courses or training?

Training that maintains, updates or upgrades a skill the business already has is a current expense. Training that gives a new skill or qualification, or counts toward a degree, diploma or professional designation, is capital and is not deducted as a current expense. A course a professional body requires or recommends is generally current (IT-357R2, archived).

The CRA archived IT-357R2 and no longer updates it, so it may not reflect the CRA's current views. Business coaching follows the general test: a cost to run and grow the existing business is deductible if reasonable; coaching that is mainly personal is not. A corporation can generally deduct training it pays for an employee, but the employee has a taxable benefit when the training mainly benefits them rather than the business.

Are golf, club memberships and conventions deductible?

No deduction is allowed for golf course or facility use, yachts, camps or lodges, or dues and initiation fees for any club whose main purpose is dining, recreation or sport (section 18(1)(l)). The one exception is the use and upkeep of a yacht, camp, lodge or golf course that the business itself rents out in its ordinary course; it does not extend to club dues. Green fees and meals eaten with a round of golf are also not deductible. A genuine business meal at a club, not tied to golf or recreation, is not barred, but the meals limit applies (IT-148R3, archived). A business that pays an employee's club dues still cannot deduct them, and the employee is generally taxed on them unless the membership mainly benefits the employer.

Annual dues to a trade or commercial association, and subscriptions to publications, are deductible (CRA line 8760).

A business can deduct attending up to two conventions a year, held by a business or professional organization at a location consistent with the organization's territory (section 20(10)). If the fee does not show the food and entertainment part separately, $50 for each day with meals is treated as food and entertainment and limited like a meal. The CRA says the location limit may not apply when an organization from another country sponsors a convention that relates to your business (CRA).

Can I deduct things I also use personally, or use on camera?

Only the business share is deductible; the personal share never is (section 18(1)(h); CRA). Split a phone, internet plan or device by a reasonable measure of business use, and keep the record that supports the split.

An item kept only for the business, such as a prop or costume used for paid content, is a business cost. Everyday clothing, grooming and gear you also use in your own life are hard to separate from personal use, and the CRA may treat them as personal even if they appear on camera. A costly item that lasts, such as a camera or lighting kit, is capital. For home office and vehicle costs, see business expenses paid personally and buying a car through your business.

Is interest on a business loan, line of credit or credit card deductible?

Interest is deductible when the borrowed money was used to earn business income or to buy property for the business (section 20(1)(c)). What the money paid for decides it, not the type of loan. When a line of credit or card mixes personal and business spending, only the interest on the business part qualifies. Interest on money borrowed for personal use or to pay overdue income tax is not deductible (CRA line 8710).

Interest on loans for passenger vehicles and vacant land has its own limits (CRA line 8710). For money borrowed to invest or buy a rental, see interest deductibility for investing and rentals.

Can my corporation deduct research costs without claiming SR&ED?

Generally yes, under the ordinary rules. If the SR&ED form is not filed by the deadline, which is 12 months after the return's filing due date, the spending is deemed not to be SR&ED (section 37(11) and (12)). The CRA then classifies it under the Act without the SR&ED rules and no investment tax credit is earned (CRA policy). Current costs such as salaries and supplies follow the tests on this page; capital equipment goes into capital cost allowance (CRA capital policy). Skipping SR&ED gives up the credit, and missing the deadline cannot be fixed later. To weigh a claim, see claiming SR&ED on your corporate return.

Do the same rules apply inside a corporation?

Yes. Sections 18, 67 and 67.1 apply to income from any business, so a corporation's T2 faces the same tests as a sole proprietor's T2125 or a partnership's statement. The difference is what happens to a personal cost. When a corporation pays an owner's personal cost, the corporation cannot deduct it and the owner may have to include the benefit in income (section 15(1)). That makes mixed-use costs inside a corporation a two-sided risk; see shareholder loans.

Example

These examples are illustrative and use Canadian dollars.

A designer's two courses

A sole proprietor graphic designer in Ontario pays C$2,000 for a course on new features of the design software she already uses. It upgrades an existing skill, so it is generally a current expense. A C$20,000 diploma in a new profession gives her a new qualification; it is capital and is not deducted as a current expense.

A café's party and client dinner

A Manitoba café corporation holds a C$1,500 holiday party open to all its staff. It is one of its six events for the year, so the full C$1,500 is generally deductible if reasonable. A C$600 dinner with a client is limited to C$300.

A realtor's sponsorship and golf club

A BC realtor's corporation pays C$1,000 to sponsor a youth team with its logo on the jerseys. The team cannot issue a donation receipt, but a reasonable amount is generally deductible as advertising. Its C$5,000 golf club membership is not deductible at all, and if the membership mainly benefits the realtor personally, it may also be a taxable benefit to the realtor.

Different for you?

• Your corporation pays costs that benefit you or your family: see shareholder loans and paying family members, and get bookkeeping help to separate personal from business costs.
• You paid business costs personally, or work from home: see business expenses paid personally.
• The cost is a vehicle or equipment: see buying a car through your business and capital cost allowance.
• You spent before the first sale, or the business lost money: see business losses.
• You want GST/HST back on these costs: see GST/HST returns and input tax credits.
• Your corporation spends heavily on research: see claiming SR&ED on your corporate return before the deadline passes.
• The CRA has asked you to support your expenses: see reviews, audits and voluntary disclosure, and get bookkeeping help to organize the records.