What CRA Means by a “Reasonable” Expense

Built to Thrive Explainer
Read time: 2-3 minutes

Where this fits: This explainer supports the Tax & Financial Discipline guide path.
Updated on: April 24, 2026

A business expense does not only need to be connected to the business. It also needs to be reasonable.

That word matters because many small business owners assume an expense is acceptable if they can explain it somehow. But a weak explanation is not the same as a reasonable business expense.

Reasonableness is about whether the cost makes sense in relation to the business, the type of work being done, the amount spent, and the support available.

The Core Idea

A reasonable expense should make sense when someone else looks at it later. That means the expense should fit:

• the size of the business
• the type of business
• the purpose of the purchase
• the amount spent
• the way the item was actually used
• the records supporting the claim

The larger, more unusual, or more personal-looking the expense is, the more important the explanation becomes.

Why Reasonableness Matters

Reasonableness helps separate ordinary business costs from costs that are inflated, personal, unsupported, or only loosely connected to the business.

For example, a software subscription for a consultant may be straightforward. A large entertainment expense with no client name or business purpose is harder to support. A vehicle cost may be partly business-related, but that does not mean the full amount belongs in the business records.

The issue is not whether the owner thinks the cost was helpful. The issue is whether the cost can be reasonably connected to earning business income.

Common Red Flags

Expenses become harder to defend when they are:

• unusually large for the business size
• inconsistent with the type of work performed
• missing receipts or invoices
• personal in nature
• claimed at 100% when use is mixed
• not clearly connected to income-earning activity
• recorded without notes or support
• paid from the wrong account with no explanation

None of these automatically means the expense is wrong. But they do mean the support needs to be stronger.

What to Do in Practice

Use a simple test: Would this expense still make sense if someone else reviewed it a year from now?

If not, add a note while the details are fresh. For example:

• “Client lunch with Jane Smith to discuss project proposal”
• “Laptop used for design work and client files”
• “One-time website rebuild for business launch”
• “Business-use portion of phone plan estimated based on work usage”
• “Tools purchased for customer project”

Short notes prevent confusion later.

How This Connects to Your Records

A reasonable expense is easier to support when your records show both the payment and the purpose. That means keeping:

• receipts
• invoices
• statements
• mileage logs, if relevant
• allocation notes, if mixed-use
• business-purpose notes for unclear items

Without support, even a legitimate expense can become difficult to explain.

What “Good Enough” Looks Like

Your expense records are more defensible when:

• the expense has a clear business purpose
• the amount makes sense for the business
• receipts and invoices are saved
• mixed-use costs are allocated reasonably
• unusual items have short explanations
• categories are consistent
• the records tell the story without relying on memory

Educational Note: This explainer is educational only. It is not legal, tax, accounting, payroll, investment, or filing advice. Whether an expense is reasonable or deductible depends on your specific facts, documentation, and applicable tax rules. Speak with a qualified professional about your situation.