Introduction
Not every expense paid by a corporation is deductible for tax purposes. One of the most common causes of CRA reassessments is the deduction of expenses that are personal, capital in nature, or not directly related to earning business income.
Understanding which expenses are not deductible helps corporations avoid denied deductions and potential shareholder benefit issues.
Key Takeaways
Expenses must be incurred to earn business income
Personal expenses are not deductible
Capital expenses are deducted differently
Poor classification increases CRA risk
Who This Applies To
This applies to owner-managed corporations, incorporated professionals, and businesses with mixed personal and business spending.
How the CRA Determines Deductibility
According to the CRA, expenses must be reasonable and incurred for the purpose of earning income. Expenses that do not meet this test are generally not deductible.
Common Non-Deductible Expenses
Non-deductible expenses often include personal living costs, fines and penalties, personal portions of mixed-use expenses, and capital assets that must be depreciated rather than fully deducted.
Some expenses may be partially deductible if a clear business portion can be supported.
Capital vs Current Expenses
Capital expenses, such as equipment or long-term assets, are not deducted in full immediately. Instead, they are written off over time through capital cost allowance.
Misclassifying capital expenses as current expenses is a frequent CRA issue.
Frequently Asked Questions
Can meals always be deducted?
No. Meals are subject to limitations and must be business-related.
Are home expenses deductible through a corporation?
Only the business portion, and only with proper documentation.
What happens if non-deductible expenses are claimed?
The CRA may deny the deduction and reassess tax.
Closing
Knowing what cannot be deducted is just as important as knowing what can. Clear expense classification and consistent record-keeping reduce audit risk and help corporations stay compliant.