Self-Employed Tax Deductions in Canada: The T2125 Expense Checklist

This is the checklist of business expenses a sole proprietor deducts on Form T2125, with the T2125 line for each, what the CRA says is not deductible, and the full meals and entertainment rule. It is part of the self-employed taxes hub. How deductions differ once a business is incorporated is on small business tax deductions; the two biggest mixed-use expenses have their own pages: business use of home and vehicle expenses.

The general rule

The CRA’s guide to self-employment income, Guide T4002, sets out three limits that apply to every line below:

• Reasonable and to earn income. As a rule, you can deduct any reasonable current expense you incur to earn income.
• Business part only. You cannot deduct personal expenses, so you enter only the business part of a mixed-use expense.
• Not capital property. You cannot deduct what you spend to buy capital property (a computer, furniture, a vehicle). You deduct its cost over several years as capital cost allowance (CCA) instead; small business tax deductions covers the CCA classes and the first-year rules.

If you are a GST/HST registrant and claim an input tax credit for the GST/HST you paid on an expense, you reduce the expense by that credit. Registration itself is covered on GST/HST on freelance income.

The T2125 expense checklist

Line numbers and descriptions are from T4002, chapter 3. Enter each expense once: business-use-of-home costs, for example, go only on line 9945, not on the rent or utilities lines.

The two tests for business-use-of-home expenses (line 9945), and the limits on the claim: A self-employed person can deduct business-use-of-home expenses only if the workspace is their principal place of business, or they use it only to earn business income and on a regular and ongoing basis to meet clients, customers or patients. Only the business part of costs such as heat, electricity, insurance, property taxes, mortgage interest and capital cost allowance is deductible, worked out on a reasonable basis such as the workspace's share of the home's area. The deduction can't be more than the business's net income before it, so it can't create or increase a business loss; any amount not deducted carries forward to the next fiscal period.

Subcontracts appear higher on the form, in the cost of goods sold section (line 8360), as T4002 chapter 2 describes.

Meals and entertainment limit

This is the rule for line 8523, from the CRA’s line 8523 page and T4002:

In full:

• You can deduct at most 50% of the lesser of the amount you spent and an amount that is reasonable in the circumstances.
• The limit also applies to meals when you travel or go to a convention, conference or similar event.
• Entertainment includes tickets and entrance fees to entertainment or sporting events, gratuities, cover charges and room rentals such as hospitality suites.
• The limit doesn't apply if your business regularly provides food, beverages or entertainment to customers for pay, such as a restaurant or hotel.
• It doesn't apply to costs you bill to your client or customer and show on the bill.
• It doesn't apply to amounts you include in an employee's income, or would include except that the employee works at a remote or special work location at least 30 kilometres from the closest urban centre of 40,000 people or more (not for conferences or similar events).
• It doesn't apply to an office party or similar event open to all your employees at a location, up to six such events a year.
• It doesn't apply to a fundraising event mainly for the benefit of a registered charity.
• It doesn't apply to meals for employees housed at a temporary work camp built to serve a construction site.
• Long-haul truck drivers can deduct 80% of food and beverages consumed during an eligible travel period.
• Self-employed foot and bicycle couriers and rickshaw drivers can instead deduct the extra food and beverages their work requires, at a daily flat rate of $23.

Couriers claiming the flat rate should be ready to show logbooks of the days and hours worked, and the CRA may ask for dispatch slips.

Conventions. You can deduct the cost of attending up to two conventions a year if each one relates to your business or professional activity and is held by a business or professional organization within the geographical area where the organization normally conducts its business (that second condition may not apply when an organization from another country sponsors a convention that relates to your business or professional activity). When a convention fee includes food, beverages or entertainment that the organizer doesn’t show separately, T4002 says to subtract $50 from the fee for each day food or entertainment is provided. That amount is a meal and entertainment expense, so the limit above applies to it. Coffee and doughnuts at convention meetings don’t count as food or entertainment.

Keep the receipt for each meal with a note of who attended and the business purpose; the record-keeping rules are below.

Phone and internet

Line 9220 covers telephone and utilities you incur to earn income. T4002 draws these lines: the basic monthly rate of your home telephone is not deductible, but long-distance business calls made on it are; a separate telephone used only for business calls is deductible, including its basic monthly rate; and for a cellphone you deduct the percentage of airtime expenses you use to earn business income. Buying a phone or computer is a capital purchase: you claim CCA on the business part rather than deducting the price.

Paying family members

You can deduct a salary you pay your child, or your spouse or common-law partner, if you actually pay it, the work is necessary for earning business income, and the salary is reasonable given the person’s age and is what you would pay someone else. Keep proof of payment and report the salary on a T4 slip as for any employee. Salary or drawings paid to yourself are never deductible.

Private health services plan premiums

Premiums for health and dental coverage through a private health services plan (PHSP) are an “other expense” on line 9270 if you meet all of these conditions from T4002:

• you are actively engaged in your business on a regular and continuous basis, individually or as a member of a partnership;
• the premiums insure you, your spouse or common-law partner, or members of your household;
• in the year or the previous year, either your net self-employment income (not counting losses and PHSP deductions) is more than 50% of your total income, or your income from other sources is $10,000 or less;
• the coverage is under a contract with an insurance company, a trust company, a business that administers PHSPs, or a qualifying tax-exempt union or business or professional organization.

You can’t deduct premiums someone else deducted, or premiums that you or anyone else claimed as a medical expense.

Limit with no employees. If you had no employees throughout the year, the yearly limit is $1,500 for yourself, $1,500 for your spouse or common-law partner and each household member aged 18 or older at the start of the insured period, and $750 for each household member under 18. The limit is prorated by the number of days each person was insured.

Limit with employees. If you had at least one qualified employee throughout the year and at least half the insurable people in the business were qualified employees, the limit is based instead on the lowest cost of equivalent coverage for each qualified employee, multiplied by the share of that employee’s premium you pay. If a qualified employee has no coverage at all, your own premiums aren’t deductible from business income (they may still count as medical expenses). Mixed cases and part-year employees have their own formulas in T4002.

What is not deductible

Driving between home and a regular place of business is generally personal: the CRA’s archived bulletin on self-employed vehicle expenses (IT-521R) treats it as deductible only when the home is the base of business operations. The vehicle expenses page explains when that is.

What a deduction is worth

A deduction lowers your net self-employment income, so it reduces your income tax and, while that income is between $3,500 and $85,000 (the 2026 CPP basic exemption and year’s additional maximum pensionable earnings), your CPP contributions too, which are calculated on net self-employment income. The saving is less than the amount of the expense.

The self-employed tax calculator runs the same calculation for your own income and province.

Records

The CRA says to keep your records for six years from the end of the last tax year they relate to (unless it lets you destroy them earlier), at your Canadian residence or place of business unless it allows another place; you are responsible for them even when a bookkeeper or accountant keeps them, and you must make them available to the CRA on request. Receipts are what support each line above; for a vehicle, the CRA also expects a record of business and total kilometres.

Related pages

• How to complete Form T2125
• Business-use-of-home expenses for the self-employed
• Vehicle expenses for the self-employed
• Small business tax deductions: sole proprietor vs corporation
• First-time self-employed taxes
• GST/HST on freelance income