What is the basic test for deducting a business expense?

The expense must be incurred to earn business income and must be reasonable in the circumstances. Personal expenses are not deductible, and several categories (like meals and entertainment) are only partially deductible.

Can I write off my work clothes?

Usually not. Clothing is only deductible if it is genuinely specialized protective gear, such as a welding helmet or medical PPE. The book’s rule of thumb is that anything you could wear outside of work — including steel-toed boots — is treated as a non-deductible personal expense.

Are business meals fully deductible?

Generally only 50% of eligible meal and entertainment costs are deductible, and the amount must be reasonable. There are special rules for certain travel and for some transport workers, so check the current limits for your situation.

Should I incorporate to save tax?

Incorporation can lower tax on income you leave inside the company, since corporate rates are lower than top personal rates. But the advantage applies mainly to surplus income you are not spending personally — once you pay it out to yourself, it is taxed in your hands. Incorporation also adds cost and complexity, so it is worth professional advice.

Can I pay my kids or spouse from the business?

You can pay them a reasonable amount for genuine work, which can shift income to a lower bracket. The pay must reflect what you would pay an arm’s-length person for the same job, and the work must be real. Be aware of the TOSI rules, which restrict income-splitting beyond a reasonable salary.

How long do I keep business records?

Keep receipts, invoices and logbooks for at least six years from the end of the tax year. The book suggests keeping them a year or two longer, because if the CRA suspects fraud or gross negligence it can reassess beyond the normal period.

Self-Employment and Small-Business Deductions in Canada

If you are self-employed or run a small business, deductions are where the real tax savings live. The governing principle is straightforward: you can deduct expenses incurred to earn business income, as long as they are reasonable. Beyond the everyday write-offs, there are bigger strategic moves — turning a hobby into a side hustle, deciding whether to incorporate, and paying family members for legitimate work. This guide, drawn from tax lawyer Dale Barrett’s "Pay WAY Less Tax!", covers the essentials.

What expenses can a self-employed person deduct?

The test the book repeats is simple: the expense must be incurred to earn the business income and must be reasonable under the circumstances. The CRA publishes a list of common deductible business expenses, and it is broad.

A few traps are worth knowing. Meals and entertainment are generally only 50% deductible. Clothing is not deductible unless it is genuinely specialized protective gear (a welding helmet or medical PPE) — the rule of thumb is that anything you could wear outside work, including steel-toed boots, counts as a personal expense. And small office supplies are deductible, but furniture and equipment are capital items handled differently.

Advertising (including digital advertising)
Business start-up costs, and legal and accounting fees
Insurance, interest and bank charges on business borrowing
Maintenance and repairs, rent, and property taxes on business premises
Salaries, wages and benefits paid to employees
Supplies, office expenses, telephone and utilities
Meals and entertainment (generally limited to 50%)
Motor vehicle expenses (business-use portion, with a log)

How can turning a hobby into a side hustle save tax?

The book makes an appealing case for the side hustle: if you are going to spend money on something you enjoy anyway, building a small business around it lets you deduct related expenses while still using the equipment and output personally.

The examples are practical — if your hobby is 3D printing, a small 3D-printing business lets you write off the printer, filament and a share of home-office costs; if you love cooking, a small catering business does the same for equipment, and you still enjoy the leftovers. The key is that it must be a genuine business carried on with a reasonable expectation of profit, not a disguised personal pastime.

Should you incorporate your business?

Incorporation offers liability protection and a potential tax advantage, but it is not right for everyone. The book frames the tax benefit clearly: income earned and left inside a corporation is taxed at a lower rate than the same income earned personally, which leaves more money inside the company to invest or grow.

Its illustration: on $50,000 of surplus income at an assumed 50% personal rate versus a 15% corporate rate, the personal route pays $25,000 in tax immediately while the corporate route pays $7,500 — a large short-term differential that the corporation can put to work. The catch is "surplus": the advantage applies to money you are not spending personally each month, because once you pay it out to yourself it is taxed in your hands. The author also notes that when a corporation does not fit, a partnership can sometimes let people in different tax brackets work together.

Can you pay family members to split income?

Yes — within limits. Paying a reasonable salary to a spouse or children for real work is a legitimate way to move income from a high bracket to a low one and increase the family’s after-tax income. The book’s example: a parent in a 53% bracket who pays two teenagers $10,000 each for genuine part-time work can shift $20,000 out of the top bracket, and if the teens have no other income they may pay little or no tax on it.

The guardrails matter. The amount must be reasonable — what you would pay a stranger for the same job — and the work must be real. The book also flags the TOSI (Tax on Split Income) rules, which can be "very punitive" and make income-splitting with family members difficult beyond paying a reasonable wage. Anything more complex than a fair salary is a "consult a professional" situation.

This is general information, not tax advice. Tax rules and dollar amounts change every year — verify the current CRA rules or consult a tax professional before you file.

Frequently asked questions

What is the basic test for deducting a business expense?: The expense must be incurred to earn business income and must be reasonable in the circumstances. Personal expenses are not deductible, and several categories (like meals and entertainment) are only partially deductible.
Can I write off my work clothes?: Usually not. Clothing is only deductible if it is genuinely specialized protective gear, such as a welding helmet or medical PPE. The book’s rule of thumb is that anything you could wear outside of work — including steel-toed boots — is treated as a non-deductible personal expense.
Are business meals fully deductible?: Generally only 50% of eligible meal and entertainment costs are deductible, and the amount must be reasonable. There are special rules for certain travel and for some transport workers, so check the current limits for your situation.
Should I incorporate to save tax?: Incorporation can lower tax on income you leave inside the company, since corporate rates are lower than top personal rates. But the advantage applies mainly to surplus income you are not spending personally — once you pay it out to yourself, it is taxed in your hands. Incorporation also adds cost and complexity, so it is worth professional advice.
Can I pay my kids or spouse from the business?: You can pay them a reasonable amount for genuine work, which can shift income to a lower bracket. The pay must reflect what you would pay an arm’s-length person for the same job, and the work must be real. Be aware of the TOSI rules, which restrict income-splitting beyond a reasonable salary.
How long do I keep business records?: Keep receipts, invoices and logbooks for at least six years from the end of the tax year. The book suggests keeping them a year or two longer, because if the CRA suspects fraud or gross negligence it can reassess beyond the normal period.