Short answer: Claim home-office and vehicle costs only to the extent the applicable business or employment rules and records support them. The method differs for a sole proprietor, an employee of their corporation, and a Quebec employee, so identify the work arrangement before calculating a deduction.
Home Office Expenses
Self-employed individuals may deduct home office expenses if the workspace is their principal place of business, or if it is used only to earn business income and regularly and continuously to meet clients or customers. Incorporated contractors follow different employee or corporate reimbursement rules rather than claiming a personal T2125 deduction, covered in the home office expenses for incorporated contractors guide.
The deduction is calculated as the business-use portion of eligible home expenses. The workspace area divided by the total finished area of the home is a common starting point. Where a qualifying principal place of business is also used personally, the calculation must also reflect the time used for business.
Eligible expenses for renters:
- Rent
- Heat, electricity, water
- Internet (the business-use portion)
- Tenant’s insurance (the business-use portion)
- Maintenance and cleaning supplies
Eligible expenses for homeowners:
- Heat, electricity, water
- Maintenance and minor repairs
- Mortgage interest (not principal)
- Property taxes
- Home insurance (the business-use portion)
Homeowners cannot deduct capital cost allowance (CCA) on the home without risk of affecting the principal residence exemption on disposition. Most self-employed homeowners avoid CCA on the home for this reason.
When the Workspace Qualifies
If the workspace is the sole proprietor’s principal place of business, CRA does not require exclusive business use. A dining room table used for both business and family meals may qualify under that test, but only a reasonable business portion of the home costs can be deducted. Record the workspace area and the hours it is used for business.
If the home is not the principal place of business, the alternative test requires the workspace to be used only to earn business income and regularly and continuously to meet clients or customers. A separate room is not itself the legal test. Keep records supporting whichever test applies. See what to do if CRA contacts you about a home office claim.
Calculation Example
A self-employed IT contractor rents a 900 sq ft apartment and uses a 120 sq ft spare bedroom as a dedicated home office.
Business-use percentage: 120 / 900 = 13.3%
Monthly rent: CAD $2,200 Annual rent: CAD $26,400 Home office deduction: CAD $26,400 x 13.3% = CAD $3,511
Plus 13.3% of utilities, internet, and other eligible expenses.
Home Office Expense Limitations
Home office expenses can reduce business income to zero but cannot create or increase a business loss. Unused amounts can be carried forward to future years.
Vehicle Expenses
Self-employed individuals can deduct vehicle expenses proportional to business use. The key distinction is between business travel and personal travel.
Business travel includes:
- Travel between different work sites
- Travel to client locations
- Travel to suppliers or professional meetings
- Travel to your office or workplace (if you have a separate location)
Personal travel includes:
- Commuting from home to a fixed place of business (if the home office does not qualify as a place of business)
- Personal errands, family travel, and vacation driving
For sole proprietors with a home office that qualifies as the principal place of business, travel from home to client locations is business travel.
Calculating the Business-Use Percentage
The business-use percentage requires a logbook. CRA requires documentation of total kilometres driven and business kilometres driven for each trip.
A logbook records: date, destination, purpose, and kilometres for each business trip. Total annual kilometres are tracked from odometer readings.
CRA does accept a simplified logbook after establishing a base year with a full logbook and confirming the usage pattern remains consistent.
Eligible vehicle expenses:
- Fuel
- Insurance
- Maintenance and repairs
- Licence and registration fees
- Lease payments (within prescribed limits)
- Capital cost allowance (for owned vehicles, within prescribed limits)
- Loan interest (within prescribed limits)
Prescribed Limits (2025 Tax Year)
- Maximum capital cost of a passenger vehicle for CCA purposes: CAD $37,000 (before HST)
- Maximum deductible lease cost: CAD $1,050 per month (before HST)
- Maximum deductible interest on a vehicle loan: CAD $300 per month
These limits apply to passenger vehicles (class 10.1). Work trucks and utility vehicles may fall under different CCA classes with higher limits.
Calculation Example
An insurance broker drives 18,000 km per year. Logbook records confirm 11,700 km of business travel.
Business-use percentage: 11,700 / 18,000 = 65%
Annual vehicle expenses:
- Fuel: CAD $3,600
- Insurance: CAD $2,100
- Maintenance: CAD $800
- CCA (owned vehicle): CAD $4,200
- Total: CAD $10,700
Vehicle deduction: CAD $10,700 x 65% = CAD $6,955
Documentation Requirements
Both deductions require documentation to survive a CRA review:
For home office:
- Square footage calculation or floor plan
- Receipts or statements for all home expenses claimed
- Evidence that the workspace qualifies under the principal-place-of-business or exclusive-use-and-client-meetings test
- Hours-of-use record if a qualifying principal workspace also has personal use
For vehicle:
- Mileage logbook (date, destination, purpose, km per trip)
- Annual odometer start and end readings
- Receipts or statements for all vehicle expenses claimed
CRA can request documentation for any deduction claimed on a T2125 return. Missing documentation results in denial of the deduction and potential reassessment with interest. For a step-by-step guide to organizing these records throughout the year, see How IT Contractors Should Organize Tax Documents.
The categories and documentation above apply across Canada, but Quebec contractors claim them through an additional form and a second reviewing agency. The business expenses for Quebec IT contractors guide covers what changes when Revenu Québec is involved alongside CRA.
Home office and vehicle deductions are among the most commonly reviewed items on self-employed returns. For IT contractors claiming both, working with a CPA who understands the documentation CRA expects and how to calculate the deductions correctly reduces the risk of a review resulting in a disallowed claim.