Running a small business in Canada comes with a wide range of responsibilities—and a unique set of tax advantages. One of the best ways to reduce your business’s tax burden is by taking advantage of all the tax deductions you’re eligible for. But knowing what you can and can’t deduct is key to staying compliant and maximizing your return.
Whether you’re a freelancer, entrepreneur, or owner of a growing company, here’s what you need to know about small business tax deductions in Canada.
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The Small Business Deduction (SBD)
The Small Business Deduction (SBD) is one of the most valuable tax breaks for Canadian-controlled private corporations (CCPCs). It allows eligible businesses to pay a reduced federal corporate tax rate on the first $500,000 of active business income.
Eligibility for the SBD:
- Your business must be a Canadian-controlled private corporation.
- The income must be from active business operations (not investment income or capital gains).
- The deduction is available up to the $500,000 threshold, but this limit is shared among associated corporations.
Taking full advantage of the SBD can significantly lower your overall tax rate and free up funds to reinvest in your business.
Common Tax Deductions for Small Businesses in Canada
Here are some of the most common and valuable deductions Canadian small businesses can claim:
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Home Office Expenses
If you operate your business from home, you may be able to deduct a portion of:
- Rent or mortgage interest
- Utilities
- Internet
- Property taxes
- Home insurance
The deductible amount is typically based on the percentage of your home used for business.
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Vehicle Expenses
Do you use your car for business? You can deduct:
- Fuel and maintenance costs
- Insurance
- Lease payments or depreciation
- Parking and tolls
Be sure to keep a detailed log of your mileage and business-related trips.
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Office Supplies and Equipment
Items like pens, printer ink, computers, and phones used for business can be fully or partially deductible.
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Salaries and Contractor Payments
Wages paid to employees and payments made to subcontractors or freelancers are deductible business expenses. Keep T4 and T5018 slips organized for accurate reporting.
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Marketing and Advertising
Online ads, print media, social media campaigns, and even business cards are all valid deductions under advertising and promotion.
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Professional Fees
Fees paid to lawyers, accountants, consultants, or business coaches can be deducted as long as they relate to your business operations.
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Business Insurance
Premiums for commercial insurance policies, including liability, property, and errors & omissions, are deductible.
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Travel and Meals
If you travel for work, you can deduct:
- Flights
- Hotel stays
- Meals (50% deductible in most cases)
Just make sure it’s for legitimate business purposes and you keep the receipts.
Common Mistakes to Avoid
While there are many opportunities for tax savings, small businesses often make mistakes that can lead to audits or missed deductions.
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Mixing Personal and Business Expenses
Always keep your personal and business finances separate. Use a dedicated business bank account and credit card.
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Failing to Keep Records
The CRA requires that you keep receipts, invoices, and logs for at least six years. If you can’t back up your deductions, you may lose them in an audit.
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Overclaiming or Guessing
Estimating your deductions or inflating claims can lead to penalties. Be honest, and seek help from a tax professional when in doubt.
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Missing Out on Lesser-Known Deductions
Many business owners don’t realize they can deduct things like software subscriptions, bank fees, or professional development courses. Every dollar counts.
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FAQ
Q1: Can I deduct my entire home rent if I run my business from home?
A: No, only the portion of your home used for business (based on square footage or usage) is deductible.
Q2: Are meals with clients 100% deductible?
A: No, only 50% of the cost of meals and beverages is generally deductible, even for business purposes.
Q3: Can I write off my personal car if I sometimes use it for business?
A: You can’t deduct the whole car, but you may claim a percentage of expenses (fuel, insurance, maintenance) based on business mileage vs total mileage.
Q4: Do I need receipts for every small purchase like pens or printer ink?
A: Yes, the CRA requires receipts for all business expenses, no matter how small, to validate deductions.
Q5: Can I deduct travel expenses if I combined business with personal vacation?
A: Only the portion directly related to business (flights, hotels, meals for work days) is deductible. Personal expenses must be excluded.
Q6: Are salaries paid to family members deductible?
A: Yes, but only if the salary is reasonable for the work performed and properly documented with payroll records.
Q7: What happens if I claim deductions without proper documentation?
A: The CRA may deny the deduction, charge penalties, and even audit your business. Keeping records for at least 6 years is mandatory.