Business vs Personal Expenses: How CRA Decides What Qualifies

The Core Question the CRA Asks

For every expense you claim on your T2125, the CRA applies one fundamental test:

> Was this expense incurred for the purpose of earning business income?

If yes — and if the amount is reasonable — it is deductible. If it was primarily personal, it is not. If it was a mix of both, only the business portion qualifies. Getting this distinction right is the foundation of every T2125 you file.

Purely Business Expenses

Some expenses are clearly business in nature:

These are straightforward. Log them at full cost under the correct T2125 category.

Purely Personal Expenses

Some expenses are clearly personal and never deductible:

Claiming these on a T2125 is the clearest path to a CRA problem.

Mixed-Use Expenses: The Tricky Middle Ground

Most disputes happen here. Many items serve both business and personal purposes:

Phone: You use it for business calls, emails, and client communication — and also for personal calls and social media. Only the business-use percentage is deductible on Line 9220.

Internet: Similar situation. If you work from home, your internet is partly business. The business-use proportion (often 50–70% for full-time freelancers) is deductible.

Vehicle: If you drive for both business and personal reasons, only the business-use proportion of all vehicle costs is deductible. Business kilometres ÷ total kilometres = your deductible percentage.

Home: Only the space used exclusively or primarily for business qualifies under Line 9945. The rest of your home costs are personal.

Laptop and equipment: If you use your computer for both work and personal use, a reasonable business-use percentage applies. Most freelancers claim 70–90% — be able to justify whatever you claim.

The "Reasonable" Standard

Even for clearly business expenses, the CRA requires the amount to be reasonable. An $800 dinner claimed as a client meal when you are a sole proprietor with $40,000 in revenue will raise questions. A $50 lunch with a client is proportionate and expected.

Reasonable means what a sensible businessperson in your industry and income level would spend. There is no hard dollar limit — it is a judgment call the CRA makes based on context.

How to Handle Mixed-Use Expenses on Your T2125

1. Track the full cost of the expense

2. Determine a reasonable business-use percentage based on actual use

3. Calculate the business portion: full cost × business-use %

4. Enter only the business portion on the relevant T2125 line

5. Keep a note explaining how you arrived at the percentage

Consistency matters. If you claim 70% business use on your phone, use 70% every month and be able to explain why that percentage is accurate.

Documentation: Your Protection

If the CRA challenges a deduction, your defence is documentation:

The burden is on you to prove the deduction. Good records make that straightforward.

Stay Organized with ClaimHero

ClaimHero lets you log each expense with a description of the business purpose and assign it to the correct T2125 category. Mixed-use items? Just enter the business-portion amount and note your calculation. Your records stay organized and audit-ready all year. Free to start.