What you cannot deduct from business income
General limitations on deductions
Section 18 lists specific expenses that cannot be deducted from business or property income even if they were genuinely incurred — personal expenses, non-business-purpose costs, and certain capital expenditures.
Plain-language explanation
Section 18 works alongside s.9 (income from business/property) to restrict what can be deducted. If s.9 gives you the general right to deduct business expenses, s.18 carves out exceptions.
Key restrictions:
*s.18(1)(a) — Business purpose test:* An expense is only deductible if it was incurred for the purpose of earning income from business or property. Personal expenses are not deductible.
*s.18(1)(b) — Capital expenditure restriction:* You cannot deduct amounts that are capital in nature. A capital expenditure gives rise to an enduring benefit (a new roof, equipment, a vehicle) and must be capitalized and depreciated via CCA under s.20.
*s.18(1)(h) — Personal/living expenses:* Personal and living expenses are explicitly excluded. This is why you cannot deduct your groceries, personal clothing, or personal car payments.
*s.18(9) — Work space in home:* Home office expenses are deductible only to the extent of your income from that business; they cannot create or increase a loss. Unused amounts carry forward.
*s.18(12) — Meals and entertainment:* Only 50% of meals and entertainment expenses are deductible.
Understanding s.18 helps you avoid audit triggers — CRA looks for personal expenses mixed in with business deductions.
Example
Isabelle runs a consulting business from home. She can deduct the business portion of her home office (say 15% of rent and utilities) but not her personal rent. She cannot deduct her personal phone plan — only the additional cost attributable to business use.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Meals and entertainment limitation codified at 50%. Prior to 1994 the limit was 80%, then reduced to 50%.
Before
80% deductible (pre-1994)
After
50% deductible
Common questions
What is the "business purpose" test for deductions? +
Under s.18(1)(a), an expense must be incurred to earn income from business or property. CRA looks at whether the primary purpose was business. An expense with a dual purpose (business and personal) must be apportioned — only the business portion is deductible.
Can I deduct 100% of my meal expenses for clients? +
No. Section 18(1)(l) and the rules following limit meals and entertainment to 50% deductible. If you take a client to dinner and spend $200, only $100 is deductible.
What counts as a capital vs. current expense? +
A current expense maintains the property in its existing state (repairs, maintenance, consumables). A capital expense creates an enduring benefit or improves the property (a new furnace, a building addition, new equipment). The capital/current distinction is a facts-and-circumstances analysis that frequently leads to CRA disputes.
Key terms
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 18. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.