Legitimate (deductible) Business Expenses
What is a Business Expense?
One of the most commonly asked questions by our clients is “what sort of things can I legitimately deduct as business expenses?”
The Canada Revenue Agency gives a very straightforward answer: Any reasonable current expense (cost) you paid or will have to pay to earn business income (revenue).
That sentence may seem rather vague, but here’s the important point: nothing that is a personal expense is deductible.
Now, we do see many examples of personal expenses being passed off as business expenses, but trying to do so is not wise: there’s a point where it becomes very, very suspicious…
Many meals may be legitimate business costs – the bill for taking a client out for dinner is a deductible item. There might be quite a lot of travel expense in a business year that constitutes a legitimate claim. What needs to be understood is that even if you are morally comfortable with trying to claim more than you should, the CRA has an army of auditors who exist for the sole purpose of disallowing bogus business expenses – and they know just the types of costs that are incorrectly claimed.
The two most common areas of illegitimate expense – and those which most often attract the attention of auditors – are the two types I’ve just mentioned: travel and entertainment.
Regarding travel: Business expenses claimed for a trip that is predominantly taken for non-business purposes are disallowed; if a trip is for a business conference or meeting, then the claimable portion of the trip would include airfare and accommodations and some other costs for the duration of the conference or meeting; you can not claim for any extension on either end for leisure, or for activities you choose to enjoy outside of the business-related event.
Regarding meals and entertainment: As stated above, your leisure activities outside of true business events are not legitimate expenses, so a weekly bowling game or cinema trip, for example, won’t count. Unless your supper at a nice restaurant is for the purpose of earning business income – such as taking a team of employees for dinner as part of a training event, or the aforementioned client entertainment – the cost of the meal is deductible. Going for lunch by yourself, however, whether or not you are musing over work, is not.
I could give a great many examples of unallowable items, but rather than waffle on about what’s not allowable, let’s be positive and look at the things one can claim:
Allowance on eligible capital property
Bad debts (see our article on business investment losses)
Business taxes, fees, licences, dues, memberships, and subscriptions
Capital cost allowance
Current or capital expenses
Delivery, freight, and couriers
Legal, accounting, and other professional fees
Maintenance and repairs
Management and administration fees
Meals and entertainment
Motor vehicle expenses
Salaries, wages, and benefits
Telephone and utilities
So, quite an extensive list… If you want to, you can find much more detailed information on the CRA’s website here:
If you study the CRA’s guidelines, you’ll quickly figure out that business expenses and taxes are extremely complex – that’s one of the reasons why accountants study so hard for such a long time. But if you have a good understanding of the type of things you can claim as a business expense, you will be able to help your accountant to help you avoid paying too much tax. Also, perhaps you’ll be able to make better informed decisions regarding how and where you spend money if you know what can truly be charged to the company, and what can’t.