You spent money before your business made any: a laptop, a website, business cards, a course to learn the trade. Most new sole proprietors assume those costs don’t count until they’re “officially” earning. They’re wrong, and it costs them a deduction in the year they can least afford to lose one.
Here’s what’s deductible in your first year as a self-employed Canadian, including the money you spent getting started.
The business has to have “begun”
The key CRA test: deductible expenses start once your business has actually begun, not from the moment you first daydreamed about it. The business begins when you start some significant activity that’s a regular part of running it, or are well on your way to doing so. That means registering, buying inventory, building the website, or taking the first client meeting.
In practice: the laptop and software you bought to start working is deductible. The course you took two years ago “in case” you’d ever freelance is much harder to claim. The closer a cost sits to the real start of operations, the safer it is.
Current expenses vs. capital costs
Every first-year cost falls into one of two buckets, and they’re deducted differently.
Current expenses are the day-to-day costs of operating, fully deductible in the year you incur them.
Capital costs are things with lasting value: equipment, a vehicle. These are deducted gradually through Capital Cost Allowance (CCA).
| Cost | Type | How it’s deducted |
|---|---|---|
| Business registration / name search | Current | Full, year one |
| Website design & hosting | Current | Full (hosting yearly; build may be eligible) |
| Software subscriptions | Current | Full, year incurred |
| Business cards, branding, ads | Current | Full, year one |
| Accounting / legal setup fees | Current | Full, year one |
| Laptop, camera, tools over $500 | Capital | CCA over multiple years |
| Inventory | Cost of goods sold | Deducted as you sell it |
| Office furniture | Capital | CCA (Class 8, 20%) |
A lot of self-employed owners use $500 as a rough cutoff: gear under that gets written off now, gear over that gets capitalized. It’s a useful convention for judging materiality, not an official CRA rule. The actual codified $500 threshold applies only to Class 12 (hand tools, kitchen utensils, off-the-shelf software), and Class 12 specifically excludes computers, cameras, and other electronics, which are always Class 50 or Class 8 CCA regardless of price. Treat $500 as a sanity check for what’s worth capitalizing, not a line the CRA will actually cite. Our tradespeople guide breaks down the CCA classes in detail.
A first-year loss is allowed, and useful
New businesses often spend more than they earn in year one. That’s a business loss, and on a sole proprietorship it can be applied against your other income (including a salary from a job you kept while starting up), which can produce a refund.
The CRA’s catch: there has to be a genuine reasonable expectation of profit. A real business that lost money in its first year is fine. A “business” that’s really a hobby (losing money every year with no plausible path to profit) gets its losses denied. Keep real records and a first-year loss becomes a legitimate tax benefit, not a red flag.
Recover the GST/HST you spent setting up
Here’s a move new owners miss. If you register for GST/HST, you can claim input tax credits on startup purchases you still have on hand. The rule: it covers capital property and inventory you still own at the date you register: the laptop, the office chair, unsold inventory sitting in a closet. It doesn’t reach back to recover tax on services you’ve already fully consumed. If the website design was finished and paid for months before you registered, that GST/HST is gone; a completed, already-consumed service isn’t something you can claim an ITC on after the fact.
You can register voluntarily even before you hit the $30,000 threshold, and remember that threshold isn’t only a rolling four-quarter average; topping $30,000 in a single calendar quarter triggers mandatory registration immediately, no grace period. For a business with heavy startup spending, voluntary early registration can mean recovering hundreds or thousands in GST/HST you’d otherwise eat on capital purchases and inventory. Weigh it against the obligation to start charging tax to clients; our GST/HST registration guide lays out the trade-off.
Keep every receipt from day one
The single most expensive first-year mistake is not tracking. You’re busy building the thing; the $40 here and $200 there feel too small to bother with. By April they add up to thousands in deductions you can’t prove.
From your very first purchase, keep the receipt with a note on what it was for, and separate under-$500 gear from capital assets. A new owner who tracks from day one walks into their first tax season with the T2125 essentially done.
Don’t forget the home office and vehicle from the start
Two big deductions apply in year one too. If you work from home, claim the business-use percentage of your home costs. If you drive for the business, start a mileage log on day one; you can’t reconstruct it later, and the CRA denies vehicle claims without it.
Deadlines for your first return
| Deadline | What’s due |
|---|---|
| April 30 | Tax balance owing (payment) |
| June 15 | First T1 + T2125 filing (self-employed) |
Even if year one was a loss, file the T2125: it’s how you claim the loss and set your record straight with the CRA.
Let Accountly start your books on day one
Accountly captures receipts from the first purchase, splits current expenses from capital assets, tracks the GST/HST you can recover, and helps you prepare your first T2125 as you go. No shoebox, no year-end panic.
Start free. Setup takes about five minutes. Do it before your next business purchase.
Frequently asked questions
Can I deduct expenses I paid before my business made any money?
Yes, as long as the business had actually begun: you’d started a regular business activity like registering, building the website, or taking on a first client. Costs tied to the genuine start of operations are deductible even before revenue.
Can I claim startup costs from before I officially registered?
If the spending was clearly part of beginning the business (gear, software, setup costs near the start), it’s generally deductible. Costs far removed from the real start of operations (like a course taken years earlier “just in case”) are much harder to justify.
Can a first-year business loss reduce my other income?
Yes. A sole proprietor’s business loss can be applied against other income, including employment income, which can generate a refund, provided the business has a reasonable expectation of profit and isn’t really a hobby.
Should I register for GST/HST in my first year if I’m under $30,000?
You can register voluntarily, which lets you recover the GST/HST paid on startup purchases through input tax credits. It’s often worth it when startup spending is heavy, but it also means charging GST/HST to clients. Weigh both sides.
How do I deduct a laptop or camera I bought to start my business?
A laptop or camera is capital equipment either way: Class 50 for computers, Class 8 for cameras, deducted over several years through CCA regardless of price. The $500 cutoff is a materiality convention some owners apply to smaller gear and supplies, not an official rule for electronics. Keep the receipt and purchase date regardless.
Do I have to file taxes if my business lost money in year one?
Yes: file the T2125. Filing is how you claim the loss against your other income and keep your records clean with the CRA.
The information in this guide is for general informational purposes only and is not intended as accounting, tax, business, or legal advice. Accountly does not provide professional services or act as your accountant, tax advisor, or lawyer. No client relationship is created by your use of this material. Always seek advice from qualified professionals who understand your particular circumstances before acting on any information contained herein.
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