Deductible expenses for the self-employed: a T2125 and TP-80 guide

Every business expense you forget to deduct is tax paid for nothing. Conversely, a personal expense deducted by mistake can be costly in an audit. Here are the basic rules, as applied by the Canada Revenue Agency (form T2125) and Revenu Québec (form TP-80).

The principle: an expense incurred to earn income

An expense is deductible if you incur it to earn business income and the amount is reasonable. If it serves both the business and your personal life, only the business portion is deductible: a cell phone plan used 60% for work is 60% deductible.

Expenses incurred before the business started operating, personal expenses and capital purchases are not deductible as current expenses. Capital purchases follow a separate rule, explained below.

The main lines of the T2125

Form T2125 groups expenses by line. The most common for a self-employed worker:

The home office is not reported with the other expenses: it has its own section, at line 9945. We cover it in a separate article.

Revenu Québec's TP-80 follows a similar logic, with its own line numbers.

Meals and entertainment: 50%

Business meals, show tickets and activities offered to clients are only 50% deductible on the reasonable amount spent. A few exceptions exist, for example when you bill the meal back to your client and itemize it on your invoice.

In Quebec, an additional cap, based on your gross revenue, can reduce this amount further. The deduction on the TP-80 can therefore be smaller than on the T2125.

What is not deductible

• The salary or drawings you pay yourself.
• Donations and political contributions, which give tax credits instead.
• Interest and penalties on your income tax.
• Most fines and penalties.
• Personal expenses, even when paid with the business card.

Current expense or depreciable purchase?

Property that serves you for several years, such as a computer, a camera or a desk, is not deducted all at once. Its cost is spread over several years through capital cost allowance (CCA), according to its class:

In the year of purchase, the half-year rule generally limits the deduction to half the rate. For eligible property put into use before 2028, the Accelerated Investment Incentive can replace it with a more generous first-year deduction.

Depreciation rules change often. Check the ones that apply to the year of your purchase.

Keep your supporting documents

In an audit, every expense must be backed by an invoice or receipt. Both the federal government and Quebec ask you to keep your records and supporting documents for six years after the end of the tax year they relate to. Electronic copies are accepted as long as they remain legible.

A photo of the receipt taken on the same day beats a faded till slip at the bottom of a drawer.

In MKronos

Every expense you enter is given a category, linked to its T2125 and TP-80 line. You can attach a photo or PDF of the receipt, or forward your invoices by email: MKronos reads them and suggests the expense for you to confirm. Long-lasting purchases go to the CCA module, and your annual report shows the summary line by line.

Official sources

• Canada Revenue Agency: expenses section of form T2125
• Canada Revenue Agency: line 8523, meals and entertainment (allowable part only)
• Revenu Québec: self-employed persons, determining your net income
• Canada Revenue Agency: classes of depreciable property
• Canada Revenue Agency: keeping records

This article provides general information, current as of its publication date. It does not replace advice from a professional who knows your situation.