Business vs Personal Expenses: Drawing the Line – A Complete Guide by a Montreal CPA Firm Near You

For self-employed Canadians, correctly identifying business vs personal expenses is

one of the most important—and most misunderstood—parts of tax compliance. Many

new freelancers assume that if an expense “helps the business,” it must be deductible.

But CRA applies strict rules regarding what qualifies as a business expense, and mixing

personal and business expenses is one of the fastest ways to trigger a review or audit.

Items such as groceries, personal clothing, family meals, household memberships, or

personal travel are never deductible, even if you discussed business while doing them.

Incorrectly claiming personal expenses results in reassessments, denied deductions,

penalties, and in some cases, CRA may treat them as unreported income.

Understanding the difference between business and personal expenses is essential for

every contractor, consultant, gig worker, and sole proprietor.

Legal and Regulatory Framework

CRA’s rules for business expenses are governed by the Income Tax Act, primarily:

• Section 18(1)(a) — only expenses incurred to earn business income are deductible.

• Section 18(1)(h) — explicitly prohibits deduction of personal or living expenses.

• Section 67 — expenses must be reasonable in relation to the business.

• Recordkeeping Requirements — CRA requires sole proprietors to keep detailed

receipts, invoices, and proof of business purpose for at least 6 years.

Expenses must be directly connected to earning income, not simply beneficial to the

business owner. Clothing is deductible only if it is protective or specialized (e.g., safety

boots, scrubs). Meals are deductible only at 50%, and only when clearly business-

related. Personal items—groceries, cosmetics, dry cleaning, family cellphone plans,

vacations, pets, household furniture—are never deductible. These rules define the legal

line between business and personal expenses for self-employed Canadians.

Key Court Decisions

Canadian courts have consistently upheld CRA’s strict approach to expense deductions.

In Symes v. Canada, the Supreme Court ruled that childcare expenses are personal,

not business, even if they enable the taxpayer to work.

In Black v. Canada, personal clothing, lifestyle expenses, and unsubstantiated

deductions were denied, emphasizing that personal living expenses cannot be claimed

as business costs.

In Youngman v. Canada, CRA successfully argued that the taxpayer received a taxable

benefit from personal use of corporate assets—reinforcing the prohibition on disguising

personal expenses as business expenses.

These cases highlight that courts require clear evidence that an expense was incurred

specifically to earn business income—not simply incurred while running a business.

Why CRA Targets This Issue

CRA heavily audits self-employed individuals because improper expense claims are

common. CRA focuses on:

• expenses that appear personal in nature (clothes, groceries, subscriptions, home

electronics)

• high meals/entertainment claims relative to income

• vehicle expenses claimed at unrealistic percentages

• cellphone bills with full write-offs despite personal use

• travel claims without business documentation

• home office claims without square-footage calculations

• “miscellaneous” or lump-sum expense categories

CRA also checks POS receipts, bank statements, and credit card transactions for

personal spending coded as business expenses. Because mixing business and

personal expenses inflates deductions, CRA treats this area as high-risk.

Mackisen Strategy

At Mackisen CPA Montreal, we help freelancers and sole proprietors establish a clean,

audit-proof system to separate business and personal expenses correctly. Our strategy

includes:

• analyzing your industry to identify legitimate deductions

• providing a categorized list of allowable vs non-allowable expenses

• setting up a dedicated business bank account and credit card

• teaching clients how to document business purpose for meals and travel

• allocating mixed-use expenses properly (cellphone, home office, vehicle)

• reconciling GST/HST input tax credits only to business-related expenses

• reviewing records annually to remove risky or non-deductible items

• preparing audit-ready working papers for Form T2125

This approach eliminates CRA risk while maximizing every deduction you are legally

entitled to claim.

Real Client Experience

A self-employed contractor wrote off $10,000 in clothing, groceries, and home décor as

“business supplies.” CRA denied the deductions and added penalties. We corrected the

return, identified legitimate deductions, and implemented a proper expense policy going

forward.

Another client claimed 100% of vehicle and cellphone expenses without logs. CRA

denied half. We introduced proper tracking, enabling more accurate and defensible

claims the next year.

A consultant deducted vacations by labeling them “business retreats.” CRA reassessed

her aggressively. We rebuilt her books, separated personal travel, and defended

legitimate business portions.

Common Questions

Self-employed taxpayers often ask whether “everyday clothing used for work” is

deductible. No—only uniforms or protective gear qualify.

Others ask whether meals during client meetings are deductible. Yes—but only at 50%,

with documentation.

Some ask whether they can deduct rent if working from home. Only the business-use

portion calculated using workspace-in-home rules.

Another question: Is a personal laptop deductible? Only the business-use percentage.

Why Mackisen

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

self-employed Canadians avoid costly CRA penalties by maintaining clean, compliant,

and defensible business records. Whether you need help identifying eligible deductions,

separating expenses, or preparing Form T2125, our expert team ensures precision,

transparency, and full protection from CRA risk.