Business Expenses You Can Deduct (and Those You Can’t)

Introduction
Understanding business expenses you can deduct is essential for every business owner, freelancer, consultant or corporation operating in Canada. Claiming the right expenses reduces taxable income, strengthens cash flow and maximizes tax efficiency. However, the CRA has strict rules defining allowable business expenses Canada permits, and misunderstanding those rules leads to reassessments, penalties or disallowed deductions. Québec businesses face an additional layer of provincial rules that require careful classification of expenses. Many entrepreneurs over-claim deductions due to misinformation, while others under-claim because they fear making mistakes. This guide breaks down business expenses you can deduct and those you can’t, helping businesses stay compliant, reduce audit risk and fully optimize their tax position.

Legal and Regulatory Framework
Business expenses you can deduct fall under section 18 of the Income Tax Act and specific sections of Québec’s Taxation Act. Only expenses incurred to earn business income are deductible. The CRA defines deductible expenses as those reasonable and necessary for the business. Personal or capital expenses disguised as business expenses are not allowed.

Allowable business expenses Canada recognizes include advertising, office supplies, salaries, subcontractors, utilities, home-office allocations, rent, interest, bank charges, insurance, motor-vehicle expenses, travel related to business and professional fees.

Non-deductible expenses Canada prohibits include personal meals, clothing, fines, penalties, commuting costs, personal cellphone usage not related to business and capital improvements that must be depreciated rather than expensed. Québec applies the same core principles but requires separate provincial reporting, including adjustments for QST-related input tax refunds or limitations. Knowing business expenses you can deduct and those you can’t ensures proper compliance.

Key Court Decisions
Courts have issued major rulings that clarify business expenses you can deduct. Several cases addressed the difference between personal vs business expenses, confirming that taxpayers must demonstrate a clear connection between the expense and income-earning activity. Courts ruled repeatedly that clothing, haircuts, cosmetic procedures and personal meals are not deductible even when used “for business image.”

Cases involving vehicle expenses confirmed that mileage must be properly tracked and that mixed personal/business use must be reasonably allocated. Decisions involving travel emphasized that vacations disguised as business trips are not deductible. Courts have also ruled on unreasonable expenses, reinforcing that deductions must be “reasonable in the circumstances.” Québec rulings have similarly addressed home-office deductions, vehicle claims and meals. These decisions highlight the importance of understanding business expenses you can deduct within legal boundaries.

Why CRA Targets This Issue
The CRA frequently audits business expenses because misreporting is common and can significantly reduce taxable income. The most frequent audit triggers include:
• excessive meal and entertainment expenses
• large home-office claims
• vehicle expenses without proper logs
• high travel expenses inconsistent with business needs
• cash-based businesses with unclear documentation
• deductions for personal lifestyle expenses
• deductions for family members without clear work roles

CRA auditors compare year-over-year patterns, industry averages and third-party information to identify anomalies. Québec’s Revenu Québec applies similar audit methods. Because business expenses you can deduct significantly impact taxable income, the CRA enforces strict verification.

Mackisen Strategy
Mackisen CPA uses a structured and preventive approach to identify business expenses you can deduct and eliminate those you can’t before filing. We review every category of expenses, classify deductible vs non-deductible costs, and ensure proper documentation exists for each claim.

For vehicle expenses, Mackisen ensures mileage logs, fuel receipts and lease documentation are aligned with CRA requirements. For home-office deductions, we calculate square-footage allocations and confirm eligibility for home-based business claims. For travel, we verify the business purpose and separate personal components.

We also structure bookkeeping systems to categorize allowable business expenses Canada recognizes, avoiding misclassification. For Québec businesses, we handle dual federal–provincial documentation and optimize QST recovery. The result is a clean, compliant return with maximum deductions.

Real Client Experience
Many business owners come to Mackisen after CRA or Revenu Québec reviews triggered by improper deductions. One client claimed 100 percent of vehicle expenses without a mileage log. Mackisen reconstructed mileage records, corrected the filing and negotiated reduced penalties. Another consultant deducted personal vacations as business travel. We corrected the expense classification and prevented a full audit.

A professional misclassified capital improvements as operating expenses. Mackisen separated capital vs current expenses, applied proper capital cost allowance and avoided reassessment penalties. A contractor deducted clothing and personal meals, believing they were business-related. We corrected the deductions and educated the client on compliance rules. These cases illustrate why understanding business expenses you can deduct protects businesses from costly audits.

Common Questions
Business owners often ask whether meals are fully deductible. Meals are deductible at 50 percent when incurred for business purposes—not personal meals. Another question involves vehicle expenses. Only business-use mileage qualifies; commuting is not deductible.

Many ask whether home-office expenses qualify. They do if the workspace is used regularly and exclusively for business. Others ask if personal items used occasionally for business can be deducted. They generally cannot unless a clear business purpose exists. Québec owners ask whether provincial rules differ. Québec follows similar rules but requires parallel provincial documentation. Understanding business expenses you can deduct prevents costly misunderstandings.

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’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency and protection from audit risk. When identifying business expenses you can deduct, Mackisen provides full documentation review, category optimization and strategic tax planning to help businesses reduce taxable income safely and effectively.