Home office and vehicle expenses are among the most common deductions for self-employed Canadians and among the most frequently miscalculated. The rules for sole proprietors filing T2125 are different from the rules for employees, and the calculations require documentation that many people do not keep.
Home Office Expenses
Self-employed individuals can deduct home office expenses if the workspace is used exclusively and regularly for business, or is the principal place of business.
The deduction is calculated as the business-use portion of eligible home expenses. The business-use percentage is typically calculated by dividing the square footage of the workspace by the total square footage of the home.
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.
The Exclusive Use Requirement
The workspace must be used exclusively for business purposes. A dining room table used for both family meals and client calls does not qualify as a dedicated workspace.
CRA takes this requirement seriously during audits. A dedicated room that meets the exclusive use test is the cleanest approach. Mixed-use spaces create audit risk. 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 space meets the exclusive use test
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.