Business Expenses — Montreal CPA Firm Near You: What You Can Deduct, Current vs Capital, Grants, GST/HST, and CRA Rules

Business expenses are at the heart of tax planning for self-employed individuals, professionals, and corporations. The CRA allows you to deduct reasonable expenses you incur to earn business income—but only if they are properly categorized, documented, and adjusted for GST/HST, grants, and rebates. Getting this wrong can lead to reassessments, denied deductions, or penalties. Getting it right reduces your taxable income and strengthens your audit position.

This guide summarizes the most common business expenses, the difference between current and capital expenses, how grants and GST/HST affect your deductions, and how to report these amounts correctly on Form T2125 (business/professional), Form T2042 (farming), or Form T2121 (fishing).

Current vs Capital Expenses: The Foundation

The amount you can deduct in a given year depends on whether an expense is:

• A current expense (day-to-day operating cost), or

• A capital expense (for property that gives a lasting benefit, such as buildings, vehicles, or equipment).

Key rules:

• You cannot deduct the full cost of capital property as an expense. Instead, you claim capital cost allowance (CCA) over time.

• You can deduct reasonable current expenses incurred to earn income, adjusted for:

  • GST/HST input tax credits claimed

  • Any rebates, grants, or assistance received

On Form T2125, T2042, or T2121, you must enter only the business portion of each expense. Personal expenses are never deductible.

Adjusting for GST/HST, Grants, and Rebates

When you claim GST/HST you paid on expenses as an input tax credit (ITC):

• Reduce the related deductible expense by the amount of the ITC.

• Do this in the year the GST/HST was paid or became payable (whichever is earlier).

Similarly:

• Subtract any rebate, grant, or assistance from the expense it relates to, or from the capital cost of an asset.

• The net amount goes on the expense line or into CCA.

If you cannot apply the assistance to reduce a particular expense or capital cost:

• Farmers: include it on line 9570 “Rebates” of Form T2042.

• Business/profession: include it in Part 3C at line 8230 “Other income” on Form T2125.

This ensures income and expenses are matched correctly.

Common Business Expense Categories

Below are the most common operating expenses to consider when preparing your business tax return.

Advertising

You can deduct:

• Advertising in Canadian newspapers, radio, and TV

• Finder’s fees

• Certain online and foreign website advertising (Canadian content rules do not apply to foreign websites)

Restrictions for periodicals (magazines, journals):

• 100% deductible if Canadian market–directed and original editorial content is ≥ 80% of total non-advertising content

• 50% deductible if content is < 80%

• No deduction if you advertise with a foreign broadcaster directed mainly at a Canadian market

Allowance on Eligible Capital Property

The old eligible capital property regime has been replaced by CCA Class 14.1. Intangibles formerly under ECP (like goodwill, certain licences) now follow CCA rules. These are capital, not current, expenses.

Bad Debts

You can deduct a bad debt when:

• You have determined in the year that a receivable is uncollectible, and

• The amount was previously included in income.

You cannot claim a reserve; only specific, identified bad debts.

Business Start-Up Costs

You can only deduct expenses incurred after the business has started. The start date matters:

• Pre-opening investigation, exploration, or set-up costs may be capital or non-deductible.

• Expenses incurred once you have started normal operations may be deductible.

Determining commencement can be complex; CRA guidance includes IT-364 and RC4022.

Business Taxes, Fees, Licences and Dues

Deductible:

• Annual business licence fees

• Business taxes

• Membership dues for trade or commercial associations

• Subscriptions to professional publications

Non-deductible:

• Club dues where the main purpose is dining, recreation, or sports.

Delivery, Freight and Express

You can deduct:

• Freight, shipping, courier, and delivery charges directly related to your business.

Fuel Costs (Except Motor Vehicles)

Deductible:

• Fuel, oil, lubricants used in business equipment, generators, or machinery.

For vehicles, fuel is claimed under motor vehicle expenses. For home-based business heating, fuel belongs under business-use-of-home expenses.

Insurance

You can deduct:

• Commercial insurance on business buildings, equipment, and machinery.

Insurance related to:

• Vehicles: claim under motor vehicle expenses.

• Business-use-of-home: claim under business-use-of-home expenses.

Life insurance is generally non-deductible, except in narrow situations where the policy is collateral for a business loan (IT-309).

Fishers may deduct insurance on boats and equipment and a prorated portion of insurance for mixed-use assets.

Interest and Bank Charges

You can deduct interest on money borrowed:

• For business operations

• To acquire property for business use

Limits:

• Interest on passenger or zero-emission passenger vehicles is capped.

• Interest on vacant land is limited to land income after other expenses.

• Interest on mortgages for fishing income is deductible, but principal is not.

• No deduction for interest on personal loans or overdue income taxes.

Bank charges and typical service fees are deductible as management and administration fees.

You can also:

• Deduct fees, penalties, or bonuses paid to pay off a loan early, spreading them over the remaining original term (prepaid interest).

• Deduct certain financing fees over five years at 20% per year.

• Deduct standby and guarantee fees in the year incurred, if they relate only to that year.

Interest on property no longer used in business may still be deductible (Income Tax Folio S3-F6-C1), depending on the facts.

Interest on loans against insurance policies may be deductible with proper verification on Form T2210.

Capitalizing Interest

Instead of deducting interest currently, you may choose to capitalize it:

• Add interest to the cost of depreciable property

• Add to resource or exploration costs

This affects CCA and long-term planning.

Interest on workspace-in-home belongs under business-use-of-home expenses.

Legal, Accounting and Professional Fees

You can deduct:

• Fees for tax, bookkeeping, and consulting

• Legal and accounting fees for tax advice, audit assistance, and appeals

• Fees for preparing and filing income tax or GST/HST returns

If you deduct such fees at line 23200 and later receive a reimbursement, the refund is income at line 13000.

Legal fees to purchase capital property (e.g., buildings, boats, major equipment) are capitalized and added to the asset’s cost—not deducted as current expenses.

Maintenance and Repairs

Deductible:

• Labour and materials for minor repairs and maintenance of business property.

Non-deductible:

• Your own labour value

• Capital repairs that extend the life or value of property (these are capital)

• Costs reimbursed by insurance

Repairs related to workspace in your home must be claimed under business-use-of-home expenses.

Management and Administration Fees

You can deduct:

• Bank fees

• Fees for managing your business operations

• Payment processing charges

Do not include salaries, rent, or property taxes here; they have separate lines.

Meals and Entertainment

The general rule:

• You can deduct 50% of the lesser of:

  • Actual cost incurred, or

  • A reasonable amount in the circumstances

This applies to:

• Meals while traveling

• Client meals

• Entertainment (events, tickets, hospitality suites)

Exceptions where the 50% limit may not apply:

• Businesses that regularly provide meals/entertainment (restaurants, hotels)

• Amounts billed to clients and shown on the invoice

• Certain taxable benefits included in employees’ incomes

• Office parties for all employees (up to six events per year)

• Fundraising events for registered charities

• Remote work camps and certain construction sites

Special rules apply for:

• Fishers stocking meals on boats (with offshore and inshore distinctions)

• Long-haul truck drivers (up to 80% for eligible trips)

• Extra food for self-employed couriers and rickshaw drivers (flat rate $23/day with logbooks)

Non-Compliant Short-Term Rentals

If you earn business income from short-term rentals and are non-compliant (e.g., zoning, registration, platform requirements), you:

• Cannot deduct the non-compliant portion of expenses or CCA.

Determining whether your activity is a business or property income depends on the level of services offered. If it is pure property income, rental rules under Guide T4036 apply.

Office Expenses

Deductible office expenses include:

• Small consumables like pens, paper, envelopes, stamps, paper clips, stationery.

Capital items like desks, chairs, cabinets, and calculators are NOT office expenses but capital property subject to CCA.

Prepaid Expenses

Under the accrual method:

• Deduct prepaid expenses in the year(s) in which the related benefit is received, not all at payment date.

Under the cash method (mainly for farmers and fishers):

• You generally cannot deduct prepaid expenses that relate to a tax year two or more years ahead, except inventory.

Examples:

• Prepaid rent covering 12 months over two fiscal years must be split over the relevant years.

• Multi-year service contracts must be prorated over their benefit periods.

Property Taxes and Rent

You can deduct:

• Property taxes and rent for land and buildings used in your business.

If the property is your home, the business portion belongs under business-use-of-home expenses.

Salaries, Wages and Benefits

You may deduct:

• Gross salaries and wages to employees

• Employer contributions to CPP/QPP, EI, Quebec parental insurance, and workers’ compensation

• Employer-paid premiums for sickness, accident, disability, or income insurance plans

You must:

• File T4 and T4A slips annually

• Distinguish between employees and contractors; if unsure, request a CPP/EI ruling.

Not deductible:

• Salaries, drawings, or “wages” paid to yourself or partners (self-employment income is reported differently).

You may deduct reasonable salaries paid to:

• Your children

• Your spouse or common-law partner

Conditions:

• Work performed must be necessary for the business

• Pay must be reasonable for duties and age

• Payment must be documented (cheques, receipts)

If you pay them with business products instead of cash, the fair value is both income to them and an expense to you (and must be added to your sales).

Supplies

Supplies are items consumed indirectly in providing goods or services, such as:

• Cleaning products used by tradespeople

• Medical or veterinary supplies

• Consumables used in trade-specific activities

Telephone and Utilities

You can deduct:

• Telephone, internet, and utility costs used to earn business income.

Business-use-of-home portions must be allocated and claimed on the business-use-of-home section, not double-counted.

Travel

You can deduct:

• Transportation (air, train, bus, taxi, rideshare)

• Hotels and lodging

• Meals (subject to 50% rule unless special rules apply)

Travel must be directly related to earning income, not personal vacations or mixed-use without documentation.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you are a consultant, professional, contractor, farmer, fisher, or incorporated business owner, our team helps you:

• Distinguish current vs capital expenses

• Apply GST/QST input tax credits correctly

• Integrate grants, subsidies, and rebates

• Optimize deductions in every category

• Prepare Forms T2125, T2042, or T2121 accurately

• Maintain audit-ready records and documentation

If you want to be sure every dollar you spend is deducted properly—and safely—Mackisen can review your expenses line by line and build a structure that protects you in front of the CRA.