If Part 1 gave you the foundation, Part 2 answers the question every Canadian business owner asks at some point:

“Is this deductible?”

It sounds simple — but the CRA has a very specific definition of what actually counts as a business expense. Understanding it will save you money, prevent audit problems, and keep you out of grey-area guesswork.

Let’s break it down in plain English.

The CRA’s Core Rule: Necessary, Reasonable, Business-Related

For an expense to be deductible, it must meet all three criteria:

1. Necessary

It must serve a real business purpose.
If you need it to operate, earn revenue, or maintain your operations, you’re on the right track.

2. Reasonable

This is the CRA’s favourite word.
It simply means: Would another business owner in your industry look at this and say, “Yeah, that makes sense”?
A $900 ergonomic office chair? Reasonable.
A $12,000 Italian leather throne? Less reasonable.

3. Business-Related

Personal benefits kill deductions fast.
If it’s partly personal, you can still deduct — but you must prorate it.

Common Expenses That ARE Deductible

These categories almost always pass CRA scrutiny when documented properly:

• Supplies & Materials

Everything you use up in your daily workflow — from lawn fertilizer to printer ink to packaging.

• Tools, Equipment & Software

Laptops, QuickBooks, Shopify apps, saws, mowers, business phones, etc.

• Marketing & Advertising

Google Ads, flyers, sponsorships, website hosting, design work, branding.

• Vehicle Expenses

Fuel, insurance, maintenance, depreciation, parking — as long as you keep a mileage log.

• Home Office Expenses

A portion of rent, utilities, internet, insurance, and heat (based on square footage).

• Professional Fees

Bookkeeping, accounting, legal, payroll services.
(Hint: The CRA loves when these are clean and documented.)

• Cost of Goods Sold (COGS)

Inventory purchases, packaging, freight-in, raw materials.

• Employee & Contractor Costs

Wages, CPP, EI, subcontractors, admin help.

• Training & Education

Courses, certifications, books, workshops — as long as they help you earn business income.

Expenses That Are Sometimes Deductible

These need extra attention because business owners often misuse them.

Meals

50% deductible — and only when there is a clear business reason.
“Grabbed a coffee with a friend” doesn’t fly.
“Met with a supplier to negotiate pricing” does.

Travel

Flights, hotels, rental cars — deductible only if the primary purpose of the trip is business.
If half work / half vacation → prorate.

Cell Phone & Internet

Usually prorated.
If you use your phone 60% for business, only deduct 60%.

Clothing

Mostly non-deductible unless it is:
• protective (steel-toe boots),
• safety-required, or
• branded uniforms.

“Work clothes” from Lululemon don’t count.

Expenses That Are NOT Deductible

Even though people try:

• Personal groceries

Even if you “think better” when well-fed — CRA doesn’t care.

• Your daily coffee runs

Unless you’re meeting a client or business partner.

• Fines & penalties

Parking tickets, speeding tickets, CRA penalties.

• Clothing that could be worn personally

Even if you “only wear it for work.”

• Commuting

Driving from home to your main workplace is personal.

Grey Areas (Where People Get in Trouble)

1. Mixed-use expenses

Vehicles, phones, home internet — these require proration.
CRA expects a defensible percentage, not a guess.

2. “Business meals” with friends

If there’s no revenue-based purpose, it’s not deductible.

3. “Research trips”

Vacation trips disguised as business travel get red-flagged fast.

4. Luxury purchases

CRA doesn’t like extravagance.
“Reasonable” is always the test.

The Real Secret: Documentation > Guessing

If the CRA ever asks, you must show:

• the receipt
• the date
• who you were with (for meals)
• why it was a business expense
• how you calculated any percentages

Your bookkeeping should be able to tell the story clearly.
Castle can do that for you.

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