Business Expenses 101: What Can Your Company Deduct? – A Complete Guide by a Montreal CPA Firm Near You

Understanding which business expenses are deductible in Canada is essential for

reducing taxable income and avoiding CRA reassessments. Many business owners

incorrectly assume that anything “related to the business” is deductible, but CRA applies

strict criteria determining what qualifies as a legitimate expense. Deductible business

expenses must be reasonable, necessary, and directly connected to earning business

income. Whether you operate as a sole proprietor, partnership, or corporation, knowing

what business expenses are deductible in Canada helps you minimize tax, strengthen

cash flow, and avoid penalties. This guide explains the most common allowable

business expenses, expenses that CRA frequently denies, documentation

requirements, and how to properly categorize expenses to stay fully compliant.

Legal and Regulatory Framework

Business expenses in Canada are governed by section 18(1)(a) of the Income Tax Act,

which states that expenses must be incurred for the purpose of earning income. Section

67 requires that expenses be reasonable in amount. Section 20 outlines specific

allowable deductions such as interest, capital cost allowance (CCA), and employer

contributions. CRA distinguishes between:

• current expenses, which provide short-term benefit (fully deductible), and

• capital expenses, which provide long-term benefit and must be depreciated through

CCA.

Non-deductible expenses are outlined in sections such as 18(1)(l) (club dues), 18(1)(h)

(personal expenses), and 67.1 (meal and entertainment limits). GST/QST input tax

credits (ITCs) may be claimed for eligible business expenses when the entity is

registered. These statutory rules form the basis for determining what business

expenses are deductible in Canada.

Key Court Decisions

Courts have repeatedly emphasized the importance of documentation and

reasonableness in claiming business expenses. In Symes v. Canada, the Supreme

Court ruled that child-care expenses are personal and not deductible as business

expenses, reinforcing strict separation of business and personal costs. In Canderel Ltd.

v. Canada, the court confirmed that taxpayers may use any method that accurately

reflects income, giving flexibility but requiring consistency and support. In Johnston v.

MNR, CRA denied large, undocumented expenses, and the court upheld the denial

because taxpayers must provide adequate evidence. In Black v. Canada, the court

allowed partial expenses but required apportionment between business and personal

use. These cases demonstrate CRA’s rigorous scrutiny of what qualifies as allowable

business expenses in Canada.

Why CRA Targets This Issue

Business expense claims are one of the most frequent sources of CRA audits and

reassessments. CRA targets:

• excessive meals and entertainment claims

• undocumented subcontractor payments

• personal expenses disguised as business expenses

• vehicle and travel expenses without logs

• home office expenses claimed incorrectly

• capital expenses deducted as current expenses

• management fees paid without proof of service

• cash payments with no receipts

CRA also compares industry benchmarks to detect businesses with unusually high

deductions relative to revenue. Because business expense claims directly reduce

taxable income, CRA closely examines this category to ensure compliance.

Understanding what business expenses are deductible in Canada helps prevent CRA

penalties, interest, and denied deductions.

Mackisen Strategy

At Mackisen CPA Montreal, we help companies maximize legitimate deductions while

avoiding high-risk claims that trigger audits. Our strategy includes a comprehensive

review of all business expenses, categorizing them correctly as current or capital. We

reconcile expenses with bank statements, credit card statements, and vendor invoices.

For vehicle expenses, we ensure mileage logs are complete and accurate. For meals

and entertainment, we apply the 50% deduction rule and document business purpose.

For home office expenses, we calculate space usage precisely and ensure compliance

with CRA requirements. We also evaluate shareholder-related expenses, preventing

personal items from being added to corporate books. When preparing corporate returns,

we ensure all deductible expenses meet CRA standards and are supported by proper

documentation. This structured approach ensures clients maximize legitimate business

expenses in Canada while minimizing audit risk.

Real Client Experience

A construction company claimed large subcontractor payments without proper receipts;

CRA denied the deductions. We reconstructed invoices, obtained affidavits from

subcontractors, and recovered part of the deduction. Another client deducted luxury

travel costs for a trip that included both business and personal activities. CRA

challenged the claim, and we reallocated expenses to reflect only the business portion,

avoiding penalties. In a third case, a consultant deducted 100% of vehicle expenses

without a mileage log. CRA disallowed most of it. We implemented strict record-keeping

procedures and corrected future claims. These cases illustrate how improper business

expense reporting can lead to reassessments—and how expert guidance can prevent

problems.

Common Questions

Business owners often ask whether clothing is deductible. Clothing is deductible only if

it is protective or specialized (e.g., steel-toe boots). Another common question concerns

meals: only 50% is deductible unless meals are provided to employees on business

travel or at remote work sites. Many ask whether personal cell phones are deductible.

Only the business portion qualifies. Others ask whether gifts to clients are deductible.

They may be deductible, but CRA requires documentation and limits certain types.

Some ask whether capital purchases—computers, vehicles, machinery—can be fully

deducted. These must be claimed through CCA. These questions highlight the

importance of understanding what business expenses are deductible in Canada.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps

Canadian businesses stay compliant while maximizing legitimate deductions. Whether

you need detailed guidance on allowable business expenses, audit-proof bookkeeping

systems, or a full corporate tax strategy, our team ensures precision, transparency, and

protection from audit risk.