What Expenses Can a Sole Proprietor Write Off in Canada?
By the SherOps Bookkeeping Team, Edmonton, AB
This is the single most common question we field from Edmonton sole proprietors, whether they’re tradespeople, consultants, or solopreneurs just starting out. A sole proprietor can generally deduct reasonable current expenses incurred to earn business income, subject to CRA rules and specific limitations. What trips people up isn’t usually the big-ticket items, it’s the smaller, easy-to-miss ones we catch when we’re categorizing a new client’s transactions for the first time. For a broader look at how these deductions work across the country, Wave’s guide to sole proprietor tax credits and deductions is a solid starting point, though the details below are what we actually see come up for Alberta-based sole proprietors.
A business expense is not automatically deductible just because it was paid from a business bank account or credit card. The expense must have been incurred for a business purpose and meet the applicable CRA requirements.
These expenses are generally reported on Form T2125 – Statement of Business or Professional Activities, along with the individual’s T1 income tax return. You can find CRA’s guidance on completing Form T2125 here.
Some common business expenses include:
- Advertising and marketing: Website costs, online advertising, flyers, business cards and eligible promotional costs.
- Office expenses and supplies: Stationery, postage, printer supplies and similar items used for the business.
- Accounting, bookkeeping and legal fees: Professional fees incurred for business purposes.
- Business insurance: Eligible commercial and professional insurance premiums.
- Rent: Rent paid for an office or commercial space used to earn business income.
- Telephone and utilities: The business-use portion of these expenses when there is also personal use.
- Motor vehicle expenses: The business portion of eligible fuel, insurance, repairs, maintenance, leasing costs or interest, subject to CRA rules and limits. For Edmonton tradespeople and service businesses driving between job sites, this is often one of the largest deductions, and a mileage log is essential to support the business-use percentage.
- Business-use-of-home expenses: A portion of eligible home expenses may be claimed when the CRA conditions are met. The area of the home used for business and the total area of the home can help determine the business-use percentage. Other factors, such as how the space is used, may also need to be considered.
- Bank charges and interest: Eligible bank fees and interest related to operating the business.
- Meals and entertainment: Business-related meals and entertainment expenses are generally limited to 50% of the eligible amount, although some exceptions apply.
- Salaries and wages: Eligible amounts paid to employees, including certain employer payroll costs.
- Travel expenses: Eligible costs incurred while travelling for business purposes, subject to the applicable rules.
What About Computers, Furniture and Equipment?
Capital assets such as computers, furniture, equipment and vehicles are different from regular day-to-day business expenses. Instead of simply deducting the full purchase price as an expense, the cost may need to be claimed over time through Capital Cost Allowance (CCA), depending on the type of asset and the applicable CRA rules.
What About GST/HST?
If you are registered for GST/HST, the GST/HST paid on eligible business purchases may be recoverable through Input Tax Credits (ITCs). This can affect the amount that is recorded and claimed as a business expense. Since Alberta doesn’t have a provincial sales tax, GST is typically the only sales tax Edmonton sole proprietors need to track for this purpose.
Keep Good Records
Being able to claim an expense starts with keeping good records. Keep your receipts, invoices and supporting documents, and make sure you can identify the business purpose of your expenses. Keeping your personal and business transactions separate also makes it easier to maintain accurate books. For a full breakdown of what CRA expects you to hang onto and for how long, see our guide to CRA record-keeping requirements.
Not sure which of these apply to you, or want help getting your write-offs organized before tax season? See how SherOps handles tax preparation for Edmonton sole proprietors, or book a free consultation.
