As a small business owner, you are entitled to deduct the ongoing costs of doing business, so long as the expenses are reasonable and have a profit-producing motive. It is important to have a good record-keeping system, however; otherwise it is inevitable that you will forget about certain expenses that you incurred when tax time comes around! Every dollar of expense that you overlook is one more dollar added to your taxable income, so don't trust your memory. Instead, write it down, and save those receipts! Some of the more common deductible expenses include advertising, promotion, rent, salaries, legal and accounting fees, and auto expenses.

The cost of advertising in Canadian newspapers and on Canadian television and radio stations is deductible, as is the cost of flyers, brochures and other promotional activities. This includes the cost of entertainment and business lunches, if used to promote your business to existing or prospective clients. However, unlike advertising or promotion, only 50% of the total cost for meals and entertainment is deductible.

Office rent paid to a third party is deductible. However, if you own your business premises, or run your business out of your home, you may not deduct the rental value of these premises. Instead, you may deduct any related expenses, such as mortgage interest, property taxes and insurance. These expenses must be prorated if part of the building is used for personal purposes.

Salaries and wages paid to employees are deductible in full, as are the employer-paid premiums for Canada or Québec Pension Plan contributions, Employment Insurance, Workers' Compensation, and sickness, accident, disability or income insurance plans. Salaries and wages paid to your spouse or child are deductible if the work done is necessary for earning business income, and the amount paid is reasonable, or equivalent to what you would have paid an unrelated person for the same type of work. Salaries drawn by you, the owner, are not deductible, however, and should not be included on the income statement.

Fees for outside professional advice or services are deductible, including consulting fees, bookkeeping and accounting fees, and tax return preparation fees.

Legal fees and similar professional fees incurred for the purpose of earning business income are deductible. These include fees paid for legal advice related to on-going business activities, or to a collection agency for the collection of bad debts. However, legal fees incurred to buy capital property are not deductible. Instead, these are added to the capital cost of the property.

Business taxes and annual business licenses are deductible. Fines and penalties for infractions of public laws, however, are generally not deductible.

Automobile expenses related to earning business income are deductible. If the auto is used only partly for business, the expenses must be prorated between business and personal use based on the relative number of kilometers driven. Apart from proration, there are no restrictions on operating expenses, such as gas, oil, repairs, insurance and maintenance. However, items related to the capital cost of the auto, like capital cost allowance, interest on auto loans, or lease payments, are restricted. For most recently acquired autos, deductibility of interest payments is limited to $250 per month and lease payments to $700 per month, plus GST and PST, or HST. Capital cost allowance is calculated on a maximum value of $27,000, plus GST and PST, or HST. Special-use vehicles, such as taxis, hearses, vans, pick-up trucks, or other vehicles used mainly to transport goods or passengers in the course of business are not subject to these capital-cost restrictions.

You may not deduct the cost of capital expenditures (expenses relating to the acquisition or improvement of a property used by the business) in the year acquired. Such expenditures normally supply a long-lasting benefit; therefore, tax law requires that their entire costs be claimed slowly, over a period of years. This is accomplished through the mechanism of the capital cost allowance system, which allows a certain percentage of the cost to be claimed each year, on a declining balance basis. The percentage varies with the type of property purchased. Capital cost allowance rules can be quite complex, since they deal with acquisition of new property, the sale of old property, and a variety of other contingencies.