Business expenses the CRA lets you deduct on T2125

The CRA lets you deduct business expenses that are reasonable current costs of earning business income, or in its own words, any reasonable current expense you paid or will have to pay to earn that income. If you're self-employed, you report those expenses on Form T2125, line by line, and that's where the details start to matter: which line a cost goes on, which costs are capital rather than current, and which come with limits.

This guide walks through the T2125 expense lines most small businesses use, with extra attention to card processing fees, terminals and other payment costs, since that's our world. It follows the CRA's own pages and the 2025 editions of Form T2125 and the T4002 guide, which cover the 2025 tax year. If you're filing for 2026, check the 2026 editions for changes before you rely on a line number. We're a payment processor, not your accountant, so confirm your own situation with one. If you file in the US, our guide to whether credit card processing fees are tax deductible covers the IRS side.

What business expenses does the CRA let you deduct?

Reasonable costs you incur to earn business income, with three conditions that trip people up. The CRA's instructions for the expenses section of Form T2125 set them out:

1. Current, not capital. You can't claim the cost of buying capital property as a current expense. A terminal, a laptop or a delivery van you buy goes through capital cost allowance instead.
2. Business part only. Personal expenses aren't deductible, so you enter only the business share of anything you also use personally.
3. GST/HST net of credits. The expense you deduct includes any GST/HST you paid on it, minus any input tax credit you claimed for it.

The third one catches people who claim input tax credits on their GST/HST return and then deduct the full tax-in price on the T2125 as well. That's the same tax counted twice. If you're registered for GST/HST, ask your accountant to check how your bookkeeping handles it.

Which T2125 lines do common business expenses go on?

The 2025 Form T2125 has a line for each type of expense. These are the ones most small businesses touch, with notes from the CRA pages we checked:

The form has more lines than this table, and the CRA's T4002 guide explains each one. Use the edition for the year you're filing, because line names and rules can change.

Where do card processing fees go on the T2125?

The CRA pages we checked don't name card processing fees on a specific line, so where they go is a call to make once, with your accountant. Two lines are the usual candidates. Line 8710 is called "Interest and bank charges." And the CRA's 2025 T4002 guide says you can deduct management and administration fees, including bank charges, that you incur to run your business, on line 8871.

The total deduction is the same either way. What matters is capturing every fee and using the same line every year, so your returns compare cleanly. Processing costs on a Canadian merchant statement usually include:

• Interchange, paid to the bank that issued each card.
• Card network fees.
• Your processor's markup, whether shown separately or folded into one rate.
• Interac Debit fees, which Interac prices as a single flat fee regardless of purchase price.
• Monthly account, statement and gateway fees.
• Chargeback fees.

Our guide to credit card fees in Canada explains what each of those is, and our guide to Interac fees covers the debit side.

A worked example

Take a bike shop in Kelowna with $410,000 in card sales in 2025. Its twelve monthly statements show $6,970 in processing fees, about 1.7% of card sales, plus $75 in fees on three chargebacks. In March it bought a countertop terminal outright.

On its T2125, the shop reports its sales in income and deducts $7,045 in fees ($6,970 plus $75) on the bank charges line its accountant picks. The terminal isn't in that $7,045. It's capital property, so it goes through capital cost allowance on line 9936. The sales it lost to those chargebacks are a separate matter from the chargeback fees, and the accountant decides how to record them.

One trap: if your processor takes fees out of each day's deposit, your bank shows sales net of fees. Record full sales from the statements and the fees as an expense, or you'll end up counting the fees twice.

How do you claim terminals, loans and other payment costs?

Split them into what you buy, what you rent, and what you borrow.

A terminal you buy is capital property, and the CRA's line 9936 is where capital cost allowance is claimed. Ask your accountant which class applies. Renting is a different case, since you never own the terminal, so ask where the monthly rental payments belong.

Interest on money you borrow for the business goes on line 8710. The CRA's line 8710 page adds a few details worth knowing:

• Fees paid to reduce the interest rate on a loan, and a penalty or bonus paid to repay a loan early, are covered there too.
• Fees to get financing, such as application, appraisal and legal fees, are deducted over five years: 20% in the current tax year and 20% in each of the next four.
• Interest on a loan for a passenger vehicle has its own limit, worked out on Chart B of the form.
• Don't deduct interest on money borrowed for personal purposes or to pay overdue income taxes.

So if you took out a $4,000 business loan with a $250 application fee to buy new terminals, the interest goes on line 8710 each year, and the $250 is deducted at $50 a year over five years.

How does the 50% rule for meals and entertainment work?

For most business meals and entertainment, you deduct half. The CRA's line 8523 page sets the maximum at 50% of the lesser of the amount you incurred and an amount that's reasonable in the circumstances. The 50% limit also applies to your meals when you travel or go to a convention, conference or similar event.

Entertainment is broader than people expect. The CRA includes tickets and entrance fees to entertainment and sporting events, gratuities, cover charges, and room rentals such as hospitality suites.

Two exceptions are fully deductible:

• Parties or similar events for all employees at a particular location, up to six such events a year.
• The cost of a fund-raising event held mainly for the benefit of a registered charity.

Here's the math. A consultant spends $1,240 on client lunches in 2025, all of it reasonable. The deductible part is $620. The Kelowna bike shop's holiday dinner for all eight staff at its one location, at $960, is deductible in full, as one of up to six such events.

Can you deduct home office and vehicle expenses?

Yes, with conditions on both, and these are the claims that draw the most questions.

Business use of your home

The CRA's business-use-of-home page allows the deduction if the workspace is your principal place of business, or if you use it only to earn business income and use it regularly to meet clients, customers or patients. You claim a share of costs such as heating, electricity, insurance and cleaning supplies, on a reasonable basis such as the workspace's share of your home's area.

There's a ceiling. Business-use-of-home expenses can't be more than your business's net income before you deduct them, so they can't create or increase a loss. Amounts you can't use carry forward to a later year.

Say a web designer in Fredericton uses a 150-square-foot room in her 1,500-square-foot house only for work, and it's her principal place of business. That's 10% of the area. If heating, electricity, insurance and cleaning supplies came to $6,200 in 2025, the business share is $620, as long as her business made at least that much before the claim.

Motor vehicle expenses

Vehicle costs go on line 9281, and capital cost allowance on the vehicle goes on line 9936. The CRA lists deductible vehicle expenses as including licence and registration fees, fuel and oil, electricity for zero-emission vehicles, insurance, interest on money borrowed to buy the vehicle, maintenance and repairs, and leasing costs.

You work out the business share on Chart A of the T2125, and the proof is a logbook. The T4002 guide's chapter on expenses asks for the date, destination, purpose and kilometres of each business trip, plus the odometer reading at the start and end of the fiscal period. A mobile groomer in Red Deer who drove 20,000 km in 2025, 8,000 of them for the business, has a 40% business share. If her vehicle costs came to $9,500, she claims $3,800.

What records does the CRA expect you to keep?

Everything that backs up a number on your T2125. The general rule, per the CRA, is to hold on to records and supporting documents for six years from the end of the last tax year they relate to.

For payment costs, that means:

1. All twelve monthly merchant statements, showing sales, refunds, chargebacks, fees and deposits.
2. Invoices for terminals you bought, and agreements for any you rent.
3. Loan agreements and interest statements for business borrowing.
4. Receipts for meals and entertainment, with a note of who attended and why.
5. Your vehicle logbook and your home workspace measurements.
6. Copies of the invoices you issued. Our guide to invoice requirements in Canada covers what they should show.

Download statements from your processor as you go rather than counting on finding five-year-old ones later.

Common mistakes with business expenses

These come up again and again:

• Deducting a terminal, computer or vehicle in full as a current expense instead of through capital cost allowance.
• Claiming 100% of client meals.
• Claiming part of the family dining room when it's neither your principal place of business nor a space used only for the business.
• Using a home office claim to push the business into a loss.
• Estimating vehicle kilometres at tax time with no logbook.
• Booking deposits net of card fees as sales, then deducting the fees again.
• Deducting the GST/HST on an expense and claiming an input tax credit for the same tax.

Next step

Before tax time, total up last year's processing fees from your statements. If you can't tell what you paid, or the fees look high once you add them up, send us a recent statement for a free statement review. We'll break your credit card processing fees into interchange, network fees and processor charges, which helps your bookkeeper and shows where you may be overpaying. Businesses anywhere in Canada can also contact us to talk it through with a rep. For the tax treatment itself, your accountant has the final word.