BUSINESS EXPENSES and CAPITAL COST ALLOWANCE
General Background:
The Income Tax Act requires a person to report “business” income, and in particular, “profit from that business”, or alternatively a business may have a “loss”.[1]
The Income Tax Act does not define profit but it’s understood to mean gross income less deductions for business expenses, resulting in a net self-employment income.[2] The gross and net income amounts are reported on lines 13499 and 13500 of a T1 Tax return.
The gross and net amounts are calculated in a T2125 form. UFile or other tax prep software completes a T2125 form based on information provided. Most lines of a T2125 are transmitted when a return is efiled.[3]
The Income Tax Act doesn’t contain a closed list of what deductions are allowed. But it contains some general principles along with some specific rules. Generally, in order to qualify as a deductible business expense, an expense must:
Case law has added that expense should be consistent with ordinary principles of commercial trading or well accepted principles of business practice.[7]
Among the specific rules, the ITA states, for example, that that a business can’t deduct membership fees or dues in any club the main purpose of which is to provide dining, recreational or sporting facilities for its members, and it can’t deduct political contributions.[8]
Capital cost allowance is a method for deducting the expense of ‘assets’ - items that endure longer than a year, such as cars, tools, computer equipment, and buildings. Instead of a one-time expense deduction, a portion of the expense is deducted each year over multiple years. For example, suppose a small car is purchased for $30,000 and used only for business. In the first year $4,500 may be deducted, and further amounts may be deducted in subsequent years.
CRA Resources:
The CRA has a number of guides for calculating expenses and capital cost allowance. These resources reflect the Income Tax Act, regulations, court rulings, and the CRA’s own policies and interpretations. They include:
HST:
If a person is not registered for HST under the Excise Tax Act, then expenses claimed on the T2125 can include HST. Otherwise don’t inlcude HST.
Motor Vehicle Expenses:
It is recommended to keep a logbook recording the odometer reading at the start and end of the year, and for each business-related trip: the date, destination, purpose, and distance traveled. Keep receipts or records for fuel, insurance, lease payments, and maintenance. Mobile apps can help track this information, and some tax software can integrate data from these apps directly. The CRA could send a review letter requesting the logbook. Here is an excerpt from an actual review letter:[9]
Motor Vehicle Purchase:
Motor Vehicle Lease:
Cell Phone:
Meal Expenses:
Home Office Expenses:
Carry Forward of Business Losses:
Internet Charges: Retain receipts and records of payments, determine the percentage of use for business purposes, and be prepared to explain and justify the calculation.
References:
[1] Secton 3(a) and s.9(1).
[2] Symes v Canada (1993 SCC) “In other words, the "profit" concept in s. 9(1) is inherently a net concept which presupposes business expense deductions. It is now generally accepted that it is s. 9(1) which authorizes the deduction of business expenses.”
[3] See CRA’s Guide RC4018, Electronic Filers Manual, Appendices G1 and G2, which list transmitted line numbers. found on a T2125.
[4] ITA, s.18(1)(a).
[5] ITA, s.18(1)(h).
[6] ITA, s.67.
[7] An oft cited case is Symes v Canada (1993 SCC)
[8] Sections 18(1), 67 to 69.
[9] This image was acquired from a 2026 Reddit post.
