Employment expenses
When calculating employment income, an individual can only claim a few specific deductions. Deductions are not permitted for taxes and interest (unless the interest is related to earning business and property income), most life insurance premiums, and casualty losses. However, allowable deductions do include travel and certain other expenses incurred by officers or employees as a condition of their employment.
Registered plans
Employees can deduct contributions to a Registered Pension Plan (RPP), Pooled Registered Pension Plan (PRPP), or Registered Retirement Savings Plan (RRSP) within certain limits. Income from these plans is taxed upon withdrawal. In some cases, individuals may also deduct contributions to an employer-sponsored foreign pension plan if they were part of the plan before moving to Canada.
Self-employed individuals can also deduct contributions to RRSPs.
For both employees and the self-employed, the RRSP deductible contribution is generally 18% of the previous year’s total employment, self-employment, and rental income subject to Canadian tax, with a maximum annual contribution of CAD 30,780 in 2023. This allowable contribution is further restricted if the individual is a member of an RPP, PRPP, or foreign pension plan while working in Canada.
Pooled Registered Pension Plans (PRPPs)
The federal PRPP is a voluntary savings plan aimed at individuals who do not have access to employer-sponsored pension plans. The tax rules for PRPPs complement the existing RPP and RRSP framework, and operate in a manner similar to multi-employer defined contribution RPPs. The provinces and territories must introduce their own enabling legislation to implement provincial and territorial PRPPs.
Tax-Free First Home Savings Account
As of April 1, 2023, Canadian residents aged 18 and over can open a Tax-Free First Home Savings Account (FHSA) if they haven’t owned and lived in a home during the year the FHSA is opened or in the previous four calendar years. Contributions to an FHSA are capped at CAD 8,000 per year, with a lifetime limit of CAD 40,000. These contributions are deductible, and any income earned within the FHSA is tax-free. Contributions can be deducted in a future year, and unused contribution room, up to CAD 8,000, can be carried forward. Funds can also be transferred from an RRSP to an FHSA without tax implications, within the contribution limits. Withdrawals for qualifying first home purchases are non-taxable. The FHSA must be closed within one year of the first non-taxable withdrawal for a home purchase or if the funds have not been used to purchase a home within 15 years of opening the account.
Personal Deductions
Deductible Non-Business Expenses
These include alimony and maintenance payments (if taxable to the recipient), certain child-care expenses, and eligible moving expenses for relocation within Canada, typically related to a job change.
Alimony and Child Support Payments
Alimony Payments: Periodic alimony payments made under a divorce decree or a written divorce/separation agreement are generally deductible, with restrictions on their nature. The recipient must include these payments as taxable income if they are a Canadian resident. Supporting documentation must usually be filed with the first Canadian tax return claiming the deduction.
Child Support Payments: These payments are generally non-deductible for the payer and not included as income by the recipient under the terms of an agreement.
Withholding Tax (WHT): Neither alimony nor child support is subject to WHT if paid to a non-resident.
Child-Care Expenses
Working parents can deduct child-care expenses if certain conditions are met. These expenses must be incurred to earn employment or business income or to pursue training or research. The deduction covers various services such as babysitting, day nurseries, and attendance at boarding schools or camps, provided the services are in Canada and meet specific rules regarding providers. If more than one person supports a child, the deduction must usually be claimed by the person with the lowest earned income (employment or self-employment income). The maximum yearly deduction is CAD 8,000 per child under seven years old and CAD 5,000 per child aged seven to 16.
Interest Expense
Interest on money borrowed for acquiring investment property or investing in a business is generally deductible. However, interest on loans used for personal purposes, such as mortgage interest on a loan to purchase a home for personal use, is not deductible.
Personal allowances
Unlike countries that permit personal exemptions and allowances in determining taxable income, Canada has adopted a system of tax credits. See the Other tax credits and incentives section for more information.
Business deductions
Business deductions for self-employed individuals generally include all reasonable expenses that have been incurred to earn business income. Business expenses include costs of goods sold, advertising, bad debts, insurance, office expenses, and capital cost allowance. A self-employed individual can also deduct expenses for the business use of a work-space in the individual’s home, if the home is the individual’s principal place of business, or the individual uses the work-space only to earn business income and it is used on a regular and ongoing basis to meet business clients, customers, or patients. Home expenses that may be deducted include utilities, home insurance, property taxes, mortgage interest, and capital cost allowance.
Immediate expensing of capital property for individuals and partnerships
Unincorporated businesses carried on directly by certain individuals and partnerships can, in the year that the eligible property becomes available for use, immediately expense up to CAD 1.5 million per taxation year of eligible property acquired after 31 December 2021 that becomes available for use generally before 2025. Eligible property consists of capital property subject to the capital cost allowance (CCA) rules, other than property included in CCA classes 1 to 6, 14.1, 17, 47, 29, and 51 (see Depreciation and amortisation in the Deductions section of the Corporate tax summary for more information on CCA).
