A Canadian small business can deduct any reasonable expense incurred to earn business income. In practice that means salaries, rent, supplies, professional fees, advertising, insurance, business-use vehicle and home-office costs, 50% of business meals, and capital cost allowance on equipment and vehicles — while personal expenses, the principal portion of loans, and most membership dues are not deductible. This guide is the complete 2026 list, organized by category, with the dollar limits and rules the Canada Revenue Agency (CRA) applies to each.
The golden rule: reasonable and incurred to earn income
Every deduction in Canada rests on one test from the Income Tax Act: the expense must be reasonable and incurred for the purpose of earning business income. If an expense is partly personal (a vehicle, a phone, a home office), you deduct only the business-use portion. Keep receipts, log the business purpose, and be prepared to support the split — documentation is what turns a legitimate expense into a defensible deduction.
A second rule separates current expenses from capital expenses. A current expense (rent, supplies, repairs) is fully deductible in the year incurred. A capital expense (a vehicle, machinery, a building) is deducted gradually through capital cost allowance over several years. Getting this distinction right is the single biggest driver of an accurate return.
Operating expenses: the everyday list
These current expenses are generally fully deductible in the year incurred, to the extent they relate to the business:
- Salaries, wages and bonuses paid to employees, plus the employer portion of CPP and EI.
- Rent for business premises and equipment.
- Office supplies, software subscriptions and small tools.
- Advertising and marketing — note that advertising in foreign media aimed at the Canadian market is restricted.
- Professional fees — accounting, bookkeeping, legal and consulting.
- Insurance on business property and liability.
- Bank charges, merchant fees and interest on money borrowed to earn business income.
- Utilities, telephone and internet (business portion).
- Repairs and maintenance that restore — not improve — an asset.
- Property taxes and business licences.
Capital cost allowance (CCA): deducting big purchases over time
When you buy something that lasts more than a year — equipment, a vehicle, a building — you claim its cost through CCA, the tax equivalent of depreciation. Each asset falls into a class with its own rate, applied on a declining-balance basis. CCA is discretionary: in a low-income year you can claim less (even zero) and carry the unclaimed amount forward.
| CCA class | Typical assets | 2026 rate |
|---|---|---|
| Class 8 | Furniture, fixtures, equipment, tools over $500 | 20% |
| Class 10 | Vehicles (cost at or under the ceiling) | 30% |
| Class 10.1 | Passenger vehicles over the $39,000 ceiling | 30% |
| Class 12 | Tools/utensils under $500, certain software | 100% |
| Class 50 | Computer hardware and systems software | 55% |
| Class 13 | Leasehold improvements | Straight-line over lease term |
| Class 1 | Buildings | 4% (6%/10% for some) |
| Class 14.1 | Goodwill and other intangibles | 5% |
Accelerated Investment Incentive (AII). As of the 2026 tax year, the federal AII is reinstated for eligible property acquired on or after January 1, 2025 and available for use before 2030. It suspends the usual "half-year rule" and grants an enhanced first-year deduction, letting you write off substantially more of a new asset in year one than the ordinary class rate. (The separate temporary measure that let CCPCs immediately expense up to $1.5 million of eligible property per year expired for property available for use after December 31, 2023 and was not extended.) The reinstated AII begins to phase out in 2030, so timing capital purchases matters.
Vehicle expenses and the 2026 limits
If you use a vehicle for business, you deduct the business-use percentage of fuel, insurance, repairs, registration, lease payments and CCA — based on a kilometre log (business km ÷ total km). The CRA caps several vehicle figures, and these are the limits as of 2026:
| Item | 2026 limit |
|---|---|
| CCA capital cost ceiling (Class 10.1 passenger vehicle) | $39,000 before tax |
| Deductible lease cost | $1,100 per month before tax |
| Deductible loan interest | $350 per month |
| Tax-free per-km allowance to employees (first 5,000 km) | confirm CRA prescribed rate |
The $39,000 ceiling means that if you buy a passenger vehicle for more than that, your CCA is calculated on $39,000 — the excess never becomes deductible. A clean mileage log is essential; the CRA routinely reviews vehicle claims.
Home office expenses
If your home is your principal place of business, or you use a space regularly to meet clients, you can deduct the business-use portion of:
- Rent or mortgage interest (not the principal), property tax and home insurance.
- Utilities (heat, electricity, water), and maintenance.
- A reasonable share of internet and phone.
You calculate the business percentage by area — the square footage of the workspace divided by the total finished area of the home, adjusted for personal/business hours where a room is shared. A key limit: home-office expenses cannot create or increase a business loss. Any amount you can't use in a low-income year is carried forward to a future year.
Meals, travel and the 50% rule
Business meals and entertainment are deductible at 50% of cost as of 2026 — a $120 client dinner yields a $60 deduction. The meal must have a genuine business purpose; meals you eat alone while working are personal and not deductible. Travel undertaken to earn business income — airfare, hotels, ground transport — is generally fully deductible, while meals on that travel still fall under the 50% rule. Conventions are limited to two per year and must relate to your business.
Commonly missed (and commonly denied) items
Often missed: the employer share of CPP/EI, accounting and tax-prep fees, business-use-of-home internet, interest on a business loan or line of credit, bad debts actually written off, and salaries paid to a spouse or family member for real work at a reasonable rate.
Not deductible: personal living expenses, the principal portion of loan repayments, most golf/club dues, fines and penalties, the non-business portion of any mixed-use cost, and life-insurance premiums (except in narrow lending situations). Drawing the line correctly is where professional bookkeeping pays for itself.
Model the corporate-tax impact of your deductions with our corporate tax calculator; for sales-tax recovery on those same purchases, see input tax credits in our GST guide. For how these deductions land on the corporate return, see our T2 corporate tax return guide, and browse common questions in our bookkeeping FAQ hub.
How RN Canada helps
RN Canada is an accounting and advisory firm with offices in Edmonton and Vancouver, led by Ozgur Duymaz, Ph.D., CPA (Canada), ACCA (UK), CMA (US). We set up your chart of accounts so every deductible expense is captured, calculate capital cost allowance and the Accelerated Investment Incentive correctly, document the home-office and vehicle business-use splits the CRA expects, and make sure nothing deductible is left on the table — or claimed where it shouldn't be. See our bookkeeping and tax filing service to have your deductions handled accurately end to end.
Frequently asked questions
A Canadian small business can deduct any reasonable expense incurred to earn business income: salaries and wages, rent, supplies, professional fees, advertising, insurance, interest, a portion of vehicle and home-office costs, 50% of business meals, and capital cost allowance on equipment and vehicles. Personal expenses, the principal portion of loan payments, and most club dues are not deductible.
As of the 2026 tax year, you may deduct 50% of the cost of food, beverages and entertainment incurred for business purposes — for example, $60 of a $120 client dinner. Meals you eat alone while working are personal and not deductible. The 50% limit applies to the cost including taxes and tip, and you should keep receipts showing the business purpose.
Yes. If you run your business from home, you can deduct the business-use portion of rent, mortgage interest, property tax, utilities, insurance and maintenance, based on the percentage of your home used for the business (by area). The space must be your principal place of business or used regularly to meet clients. Home-office costs cannot create or increase a business loss but can be carried forward.
Capital cost allowance is the tax version of depreciation. You cannot deduct the full cost of equipment, vehicles or buildings in the year you buy them; instead you claim a percentage each year based on the asset's CCA class. For example, most equipment is Class 8 at 20% and computers are Class 50 at 55%. CCA is optional each year — you can claim less to preserve the deduction.
You can deduct the business-use portion of vehicle costs — fuel, insurance, repairs, lease payments and capital cost allowance — based on the kilometres driven for business versus total kilometres. As of 2026, the CCA ceiling for a passenger vehicle (Class 10.1) is $39,000 before tax, lease deductions are capped at $1,100 per month, and loan interest at $350 per month.
Yes, provided the business had actually begun. Costs incurred to earn income once the business is operating — incorporation fees, professional fees, market research, initial advertising and supplies — are generally deductible or, if they are capital in nature, claimed through CCA. Expenses incurred before the business truly started may be denied, so timing and documentation matter.