Running your own business means wearing many hats — from marketing and sales to bookkeeping and taxes. When it comes to filing your taxes as a self-employed individual, one of the biggest areas of confusion is what expenses you can (and can’t) claim.
Each year, we see expense packages that include a mix of allowable and non-allowable costs. Sometimes business expenses that are considered perfectly legitimate for internal reporting are treated as non-deductible for tax purposes as per CRA’s rules.
If you’re self-employed — whether you’re a consultant, freelancer, tradesperson, or small business owner — understanding the difference helps you stay compliant, reduce audit risk, and maximize your deductions the right way. It also means fewer follow-up questions and adjustments by us. We handle the heavy lifting, but your clarity helps us do it faster and more cost-effectively for you.
Let’s break it down.
What Are Allowable Expenses?
Allowable expenses are the ordinary, reasonable costs you incur to earn business income. The Canada Revenue Agency (CRA) allows you to deduct these from your total revenue, as long as they’re:
- Directly related to your business activities
- Reasonable in amount
- Supported by proper documentation
Common examples include:
- Office rent or home office portion
- Advertising and marketing
- Professional fees (accountants, consultants, legal)
- Business insurance and bank fees
- Supplies, materials, and small tools
- Business-use portion of vehicle, phone, and internet
- Meals and entertainment (50% deductible when business-related)
These deductions help lower your taxable income — but only the business-use portion counts if there’s any personal overlap.
What Are Non-Allowable Expenses?
Non-allowable expenses are personal, capital, or otherwise unrelated to earning business income. These can’t be deducted, even if they feel connected to your work.
Examples include:
- Personal living costs (such as groceries, personal portion of home or vehicle expenses)
- Client gifts over CRA limits (gifts that are lavish or not clearly linked to business activity)
- 100% of meals or entertainment costs
- Traffic fines or parking tickets
- Gym or club memberships
- Charitable donations (still claimed, just not as business expenses, but as personal credits)
Commonly Mis-claimed Expenses
Some expenses sit in a grey area — and these are where most errors occur. Here’s how to handle them correctly.
1. Vehicle Expenses
Mistake: Claiming 100% of car costs.
Correct approach: Claim only the business-use portion based on a mileage log. Allowable expenses include gas, maintenance, insurance, lease payments (within limits), and interest.
Keep a detailed log of business kilometres — CRA requires it if you’re ever audited.
2. Home Office Expenses
Mistake: Overclaiming expenses based on incorrect allocation (such as including bathroom, kitchen, and other rooms in the calculation of business portion of home when mostly used personally)
Correct approach: Claim only the portion of your home used exclusively for business. If your office is 10% of your home, you can deduct 10% of rent, utilities, internet, and property taxes.
Note: Home office expenses can’t create or increase a business loss — unused amounts can be carried forward.
3. Meals and Entertainment
Mistake: Claiming the full bill for client lunches.
Correct approach: Only 50% is deductible, and only if directly related to business activities. Keep the receipt and note who attended and the purpose of the meal.
4. Cell Phone and Internet
Mistake: Claiming 100% of the bill.
Correct approach: Deduct only the business-use percentage. For example, if your phone is used 70% for business, claim 70%. CRA looks for reasonable, consistent claims.
5. Clothing and Grooming
Mistake: Claiming professional attire.
Correct approach: Only specialized or branded clothing required for your business (e.g., safety gear or uniforms) is deductible. Regular workwear, even if worn for client meetings, is not.
6. Education and Training
Mistake: Claiming unrelated courses.
Correct approach: Only courses that maintain or improve skills directly related to your business are deductible. A marketing course for a consultant qualifies; a cooking class for a web designer doesn’t.
7. Travel
Mistake: Claiming full travel costs for mixed business and personal trips.
Correct approach: Only claim the business-related portion — airfare, accommodation, and meals tied to work activities. Personal days must be excluded.
8. Subscriptions and Memberships
Mistake: Claiming personal memberships.
Correct approach: Only professional or trade memberships directly related to your income are deductible. Gym, golf, or social club memberships are not.
9. Capital Assets
Mistake: Expensing large purchases in full.
Correct approach: Use Capital Cost Allowance (CCA) to deduct the cost of assets like computers, machinery, or furniture over several years.
Why Getting It Right Matters
Claiming the wrong expenses can lead to CRA adjustments, interest, or penalties — and it may raise your audit risk. But the issue isn’t just compliance. Overstating expenses also gives you an inaccurate picture of your business’s real profitability.
Clean, accurate bookkeeping helps you:
- Avoid audit stress
- Make smarter financial decisions
- Build trust with lenders and advisors
How to Stay Organized
A few simple habits can make a big difference:
- Keep all receipts and records — CRA can request proof for up to six years.
- Use a separate business bank account and card to avoid mixing personal and business expenses.
- Track business-use percentages for shared items (like phone, internet, and vehicle).
- Review expenses regularly or work with a bookkeeper to spot non-allowable items early.
Common Expenses We Often “Back Out”
| Expense Type | Adjustment |
|---|---|
| 100% of meals or entertainment | Only 50% is allowable |
| Full phone or internet bill | Personal-use portion removed |
| Family or personal travel | Not business-related |
| Gym memberships | Personal, non-deductible |
| Clothing (non-branded) | Not deductible |
| Gifts exceeding CRA limits | Partially or fully disallowed |
| Traffic fines | Non-deductible |
| Charitable donations | Claimed as personal, not business |
| Capital purchases | Deducted through CCA |
The Bottom Line
If an expense is reasonable, business-related, and well-documented, it’s usually allowable. When in doubt, ask yourself:
“Did I spend this money to earn business income — and can I prove it?”
If the answer is yes, claim it confidently. If not, set it aside or confirm with your accountant before including it.
Accurate expense claims not only keep CRA satisfied but also ensure you understand your true financial picture — helping your business stay compliant, efficient, and profitable.
Need Help Sorting It Out?
Managing your own books can feel overwhelming — especially when you’re unsure which expenses are truly deductible. That’s where we come in.
Our team specializes in helping self-employed professionals organize their records, identify allowable expenses, and stay fully compliant with CRA. Whether you need a year-end cleanup or ongoing bookkeeping support, we’ll make sure your numbers tell the right story.
Disclaimer
The information discussed in this article is general in nature and should not be construed as any sort of advice. If you have any particular questions regarding your personal tax situation, please reach out to sandeep@multanitax.ca.
