Where the CRA spends most of its audit time
If you ask CRA auditors where they find the most adjustments in small business files, they will name three categories: vehicle expenses, home office, and meals. They are not picking on these areas randomly. They are the categories where personal and business activity are most often blurred — and the categories where small mistakes compound across years.
This is a plain-language guide to the line between personal and business expenses for Canadian small business, with the rules and the documentation that survives a question.
The CRA's basic rule
A business expense is deductible if it is incurred to earn income from the business and is reasonable in the circumstances. Three words do all the heavy lifting:
- Incurred. You actually paid or owed the amount.
- To earn income. There is a clear connection to revenue-generating activity.
- Reasonable. The amount is in line with what a sensible business owner would spend.
A $200 dinner with a client to discuss a project? Reasonable, deductible (subject to the 50 percent meals rule). A $200 dinner with your spouse on a Saturday night? Personal, even if you talked about the business at the table.
Home office
Many BC small business owners work from home. The CRA allows a deduction for the portion of home expenses attributable to the business if the home is your principal place of business or you use a specific space exclusively for business and to meet clients regularly.
Deductible portions, calculated by the percentage of your home used for business:
- Utilities (heat, electricity, water)
- Internet and telephone (business-use portion)
- Property tax and mortgage interest (sole proprietors only — not principal payments)
- Rent (if renting)
- Home insurance
- Repairs and maintenance attributable to the business space
- Depreciation on the home (advisable to skip — claiming triggers a partial loss of principal residence exemption when you sell)
The percentage is usually based on square footage. A 200 sq ft office in a 2,000 sq ft home means 10 percent of eligible expenses are deductible.
Incorporated owners can have their corporation reimburse them for home office expenses. This requires a written use-of-home policy and a defensible calculation, but it is a clean structure.
Vehicle expenses
The single most-audited expense category. The rules are strict and the documentation requirements are non-negotiable.
Deductible vehicle expenses are based on the percentage of business kilometres driven during the year. If you drove 20,000 km in total and 8,000 km were for business, your business-use percentage is 40 percent.
Deductible expenses (subject to the percentage):
- Fuel
- Maintenance and repairs
- Insurance
- Licence and registration
- Lease payments (subject to limits)
- Depreciation (CCA) on owned vehicles, subject to limits
- Interest on a vehicle loan (subject to limits)
The non-negotiable part: a logbook. The CRA expects a contemporaneous record of business trips — date, destination, purpose, and kilometres. A logbook reconstructed at year-end from memory is not contemporaneous. Mobile apps that track GPS automatically (MileIQ, Driversnote, TripLog) are the cleanest solution.
Driving from home to your regular place of business is generally personal commuting, not business kilometres. If your home is your principal place of business, almost all driving for client visits qualifies — but you still need the logbook.
Meals and entertainment
Meals and entertainment incurred to earn business income are 50 percent deductible. The other 50 percent is treated as a personal benefit and not deductible. This applies to:
- Client meals
- Staff meals (with exceptions for occasional staff functions, which can be 100 percent)
- Travel meals
- Entertainment (sports tickets, theatre, etc.)
The documentation requirement: who attended, business purpose, and the receipt. A credit card statement showing $180 at a restaurant is not enough. The CRA wants to know it was a business meeting.
100 percent deductible exceptions include:
- Meals provided to employees as a taxable benefit
- Up to six staff events per year for all employees
- Meals included in a fundraising event for a registered charity
Travel
Business travel is fully deductible for transportation, accommodation, and incidental expenses, with meals at 50 percent. Travel must be for business purposes, with documentation showing destination, dates, and business activity.
The trap: combined business-and-personal trips. If you fly to Toronto for two days of meetings and then stay three more days for sightseeing, only the business portion is deductible. Allocate carefully and document the business activity.
Cell phone and internet
A mobile phone or home internet plan used partly for business and partly for personal is deductible at the business-use percentage. Keep the calculation reasonable and documented. A separate business mobile line is cleaner — 100 percent deductible.
Clothing
Generally, clothing is personal — even a suit you only wear to client meetings. The exception is uniforms, branded work apparel, and protective clothing required for safety. A logo-embroidered jacket worn on job sites is deductible. A suit from Harry Rosen is not.
Personal items disguised as business
The CRA sees these in nearly every audit:
- Family vacations characterised as business trips
- Spouse on payroll without a defensible role and reasonable rate
- Personal subscriptions (Netflix, gym, streaming) booked to the business
- Furniture for the home characterised as office furniture
- Restaurant meals on weekends with no client present
Claiming these creates more risk than reward. Even if the dollar amount is small, finding one personal item booked to the business invites the auditor to look harder at the rest.
The reasonable test
Even legitimate expenses can be challenged if they are not reasonable. A $400 dinner with a single client to discuss a $5,000 project would invite questions. A $1,200 hotel night for a single business meeting in the next town might too. The reasonable test is fuzzy, but it lives in the back of every auditor's mind.
Documentation that survives an audit
- Receipts (paper or digital — the CRA accepts both)
- Calendar entries showing business purpose
- Emails confirming meetings
- Contracts and proposals related to expenses incurred
- Vehicle logbook, kept contemporaneously
- Home office calculation documented annually
How we keep it clean
At Fluent Books we apply a simple test to every transaction during monthly reconciliation: would this expense survive a CRA question? If the answer is no, it does not get coded as a business expense. The owner can still pay it through the business — it is just not claimed as a deduction.
If you are unsure whether your expense categorisation is defensible, book a quick review and we will look at the last quarter's transactions together. Often the fix is small, and the protection is significant.