Written by Behdad Karimi Dermeni, CPA · Reviewed by Maryam Ajorloo, CPA
A capital expense is money spent on something that keeps helping your business for more than a year, like a laptop, furniture, a vehicle, or a renovation. In Canada, you don't deduct it all at once. You record it as an asset and write it off gradually through capital cost allowance (CCA). Everyday costs that are used up within the year, like rent, software subscriptions, and bank fees, are operating expenses you deduct right away.
You've probably heard that you have to spend money to make money. True, but the Canada Revenue Agency (CRA) cares a lot about how you spent it. A $2,000 laptop and $2,000 of rent cost you the same today and get completely different tax treatment. This guide explains what a capital expense is, how the CRA decides between capital and current, and where the most common Canadian business purchases land.
If sorting purchases into the right bucket sounds like a lot of Sunday nights, it doesn't have to be. ReInvestWealth's AI Bookkeeper categorizes your transactions for you, so big purchases and everyday costs land where they belong from day one.
The rule of thumb: will it still be helping you a year from now?
Here's the one rule that explains most of this article: if a purchase will keep helping your business earn income for more than a year, it's probably a capital expense. If it gets used up within the year, it's probably an operating expense.
That's why the CRA treats the two so differently:
Operating expenses (also called current expenses) are deducted in full in the year you pay them. They reduce this year's profit, and this year's tax.
Capital expenses (also called capital expenditures, or capitalized expenses) go on your balance sheet as an asset. You then deduct a percentage of the cost each year through CCA, because the asset keeps earning for you over several years.
Notice that both get deducted eventually (land is the main exception). The question is never "can I write this off?" so much as "when?"
Capital expense vs operating expense: the CRA's tests
Most purchases are obvious. A coffee for a client meeting is not an asset, no matter how good the coffee was. But some fall in a grey zone, especially repairs and renovations. For those, the CRA looks at a handful of questions, and no single one decides it on its own:
Lasting benefit. Does the spending give you an enduring benefit, or does it recur after a short time? Repainting the office every few years is current. Building out a new office is capital.
Maintenance or improvement. Does it restore something to its original condition, or make it better than it was? Fixing a cracked laptop screen is current. Upgrading your office from basic lights to a full new electrical system is likely capital.
Part or separate asset. Are you repairing part of something you already own, or buying a new, standalone thing? Replacing a worn keyboard is a repair. Buying a second monitor is a new asset.
Relative value. How big is the cost compared to the thing it's attached to? This is a last resort, not a decider, but a $40 part on a $1,500 printer is clearly current.
Getting used property ready. Repairs to make a used asset you just bought usable are capital, because they're effectively part of the purchase price.
Getting ready to sell. Repairs made because you're selling something (or as a condition of the sale) are generally capital.
The CRA lays these out in its guidance on current expenses vs capital expenses. It's written for rental properties, but the same thinking applies to any business. And when a project is a bit of both (say, repainting the office and installing new built-in shelving), split it: the paint is current, the shelving is capital. Keep the invoices separate so the split is easy to show.
How to decide if a purchase is capital or current: 4 questions
When a purchase lands in your books and you're not sure which bucket it goes in, run through these in order:
Ask how long it will help the business. If the benefit is clearly used up within 12 months, treat it as an operating expense and stop here.
Ask whether it's a new thing or a fix. A new, standalone item (a laptop, a desk, a vehicle) is an asset. A fix to something you already own is usually a current repair.
Ask whether a fix makes it better than new. If the repair restores the original condition, it's current. If it upgrades or extends the life well beyond the original, treat it as capital.
Check the CCA class and keep the paper trail. For anything capital, note which CCA class it falls into (the list below covers the common ones) and keep the receipt. Your accountant will need both at year-end.
Running these questions on every transaction is exactly the kind of thing software should handle. See how ReInvestWealth keeps your books organized so your year-end conversation with your accountant is short.
CapEx vs OpEx: same idea, finance vocabulary
If you've seen CapEx vs OpEx in a pitch deck or a budget, it's the same split with shorter names. CapEx (capital expenditure) is what you spend on long-term assets. OpEx (operating expenditure) is the cost of running the business day to day.
The terms come from finance and budgeting rather than tax law, but they map neatly onto the CRA's categories. CapEx becomes depreciable property claimed through CCA. OpEx becomes your current-year deductions. The only twist: a choice that's purely about cash flow (like leasing a vehicle instead of buying it) can move a cost from CapEx to OpEx. A lease payment is an operating expense, while a purchased vehicle is a capital asset.
What happens after you capitalize something
Once a purchase is a capital expense, it gets a CCA class, and each class has a rate. The rate decides how fast you can write the asset off. A computer in Class 50 is written off at 55% a year on a declining balance, while a building in Class 1 crawls along at 4%. In most cases a half-year rule also limits the first year's claim.
That's about as deep as this guide goes. The CRA's classes of depreciable property page has the full list, and your accountant handles the CCA schedule on your return. Your job is simpler: record the purchase correctly and keep the receipt. (Turns out "I'll figure it out in April" is not a depreciation strategy.)
A list of common business purchases: operating expenses
These are the everyday costs most Canadian small businesses deduct in the year they pay them. One note on sales tax first: if you're registered for GST/HST, the GST/HST you pay on these costs is generally recovered through input tax credits (and QST through input tax refunds in Quebec), so it isn't part of the expense. PST in British Columbia, Saskatchewan, and Manitoba isn't recoverable, so it becomes part of the cost. For the full write-off rundown, see our guide to small business tax write-offs in Canada.
Business start-up costs
If you incorporate, the first $3,000 of incorporation costs (legal fees, filing fees) can be deducted as a current expense. Anything above that goes into Class 14.1 and is written off at 5% a year. Keep receipts for anything you paid personally before the company existed, and ask your accountant how to bring those costs into the company's books. If you haven't incorporated yet, ReInvestWealth users get 20% off incorporating with our partner Ownr, which makes getting your corporation set up properly fast and painless.
Business taxes, fees, licences, and dues
Annual licence fees, business taxes, professional association dues, and trade publication subscriptions are deductible. Club memberships are not, if the club's main purpose is dining, recreation, or sport. (The golf membership remains a personal joy.)
Charitable contributions
A corporation can deduct donations to qualified donees up to 75% of its net income for the year. Sole proprietors claim donations on their personal return as a tax credit instead. Our charitable giving guide for Canadian businesses covers both.
Education
Courses, workshops, and conferences that maintain or upgrade the skills you use in your business are deductible.
Fines and penalties
Fines and penalties imposed under federal, provincial, municipal, or foreign law are not deductible, and neither is interest on late tax payments. Sadly, the parking ticket outside your client's office stays a personal lesson.
Insurance
Commercial insurance premiums on the buildings, equipment, and liability coverage your business uses are deductible. Motor vehicle insurance goes under vehicle expenses, and home office insurance is claimed as part of business-use-of-home. Life insurance premiums are generally not deductible, though a portion may be if the policy is required as collateral for a business loan.
Interest and bank charges
Interest on money borrowed for business purposes, plus bank fees on your business accounts, are deductible.
Marketing and advertising
Ads, sponsorships of local events, promotional materials, and website hosting are deductible, with a few restrictions, such as rules for advertising in foreign media. Note that building a brand-new website can be a capital cost, while ongoing hosting and updates are current.
Management and administration fees
Fees to run the business, including payment processing fees, are deductible.
Meals and entertainment
Food, beverages, and entertainment are deductible at 50% of the lesser of what you actually paid and an amount that is reasonable in the circumstances.
Medical expenses
Premiums for a private health services plan covering you or your employees (and their dependants) are generally deductible for the business.
Office expenses
Consumables like printer ink, paper, postage, and stationery are deductible office expenses. One common mix-up: the "$500 rule" people quote applies to small tools (see Class 12 below), not to every purchase. A $450 desk chair is still furniture, which is a capital asset.
Parking fees
Parking for business purposes, like visiting a client, is deductible. Your everyday parking at your own office generally is not.
Prepaid expenses
Paid next year's insurance or a two-year software plan up front? You deduct each portion in the year it covers. The unused part sits on your balance sheet as a prepaid expense (a short-term asset) until its year arrives.
Professional fees
Legal, accounting, bookkeeping, and consulting fees for your business are deductible. Fees tied to buying a capital asset are usually added to that asset's cost instead.
Property taxes
Property taxes on property used in your business are deductible.
Rent
Rent for property used in your business is deductible.
Salaries, wages, and benefits
Gross wages paid to employees are deductible, along with the employer's share of Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums.
Software subscriptions
Monthly or annual software subscriptions (accounting, design, project management, video calls) are operating expenses. You're paying for access, not buying an asset.
Supplies
Items your business uses up indirectly to provide goods or services are deductible.
Telephone and utilities
Phone plans, internet, electricity, gas, and water used to earn business income are deductible.
Travel
Travel to earn business income, including airfare, hotels, and transit, is deductible. Vehicle costs follow their own rules below.
Vehicle lease
Lease payments on a passenger vehicle are deductible, but capped. For leases signed in 2025 or 2026, the deductible amount is limited to $1,100 a month before tax, even if your lease costs more. If an employee or shareholder also uses a company vehicle personally, a taxable automobile benefit (the standby charge and operating expense benefit) generally has to be reported on their income. The CRA's guide to business expenses has more detail on any of the items above.
A list of common business purchases: capital expenses (assets)
These purchases are capitalized: they go on your balance sheet as assets and are written off over time through CCA. Rates below are the CRA's current figures.
Buildings
Most buildings are Class 1 with a 4% CCA rate. Land is not part of the building and is never depreciated. Fixtures that are part of the building (wiring, lighting, plumbing, heating and air conditioning) are included in Class 1 too.
Building improvements
Improvements that extend the useful life of a building or make it better than its original condition are added to Class 1 as part of the building. Ordinary repairs that only restore it are current expenses.
Computers
Laptops, desktops, and general-purpose computer equipment are Class 50 with a 55% CCA rate, one of the fastest write-offs available.
Computer software
Software you buy outright (other than systems software that comes with a computer) is Class 12 with a 100% rate, though the half-year rule applies, so in practice it's written off over 2 years. Subscriptions are different: they're operating expenses (see above).
Furniture and fixtures
Desks, chairs, shelving, and other furniture, fixtures, and equipment (FF&E) not permanently attached to the building are Class 8 with a 20% CCA rate.
Patents, franchises, concessions, or licences
A patent, franchise, concession, or licence for a limited period is Class 14, written off over its remaining life rather than at a fixed rate. One with an unlimited life goes in Class 14.1 at 5%.
Phones and communications equipment
Electronic telephone and communications equipment is Class 8 with a 20% CCA rate.
Small tools (less than $500)
Small tools that cost less than $500 each, including medical or dental instruments and kitchen utensils, are Class 12 with a 100% rate. Most aren't subject to the half-year rule, so they're fully deductible in the year you buy them. Tools costing $500 or more go into Class 8 at 20%.
Passenger vehicles costing $39,000 or less
A passenger vehicle bought in 2026 that costs $39,000 or less (before tax) is Class 10 with a 30% CCA rate.
Passenger vehicles costing more than $39,000
A passenger vehicle that costs more goes into Class 10.1, also at 30%, but the cost you can claim is capped at $39,000 plus sales tax for vehicles bought in 2026 ($38,000 for 2025 purchases). The rest of the price is not depreciable. Each Class 10.1 vehicle gets its own class.
Zero-emission vehicles
Eligible zero-emission passenger vehicles are Class 54 with a 30% CCA rate. The cost you can claim is capped higher than for gas vehicles, at $61,000 plus sales tax. The CRA's classes of depreciable property page lists every class if yours isn't here.
Keep capital and operating expenses straight all year
A few habits make year-end painless:
Keep the receipt for every capital purchase. Your accountant needs the date, the cost, and what it was to put it in the right CCA class. The CRA can ask to see it for years afterward (here's how far back the CRA can audit).
Split mixed invoices. When one contractor bill covers repairs and upgrades, ask for separate line items so the current and capital portions are clear.
Let software do the sorting. ReInvestWealth's AI Bookkeeper categorizes your transactions as they come in, and the Smart Shoebox (your receipt inbox) matches each receipt to its purchase, so the paper trail builds itself.
Your books, sorted from the start
A capital expense recorded as an operating expense makes this year's profit look worse than it is, and next year's look better than it is. Neither helps you make decisions, and both make your accountant's job harder. Getting it right from the start means your income statement and balance sheet tell the true story all year, not just after year-end cleanup.
That's the job ReInvestWealth was built for. More than 3,000 entrepreneurs use it to keep their books organized, which means less time categorizing and more time running the business. Connect your bank, let the AI Bookkeeper categorize your transactions, and invite your accountant to clean, CPA-level books when it's time to file. Start free for 30 days.
Frequently asked questions
Is a laptop an expense or an asset?
A laptop is an asset, because it helps your business for several years. In Canada it falls under CCA Class 50, which has a 55% rate on a declining balance, so most of its cost is written off within the first few years.
Are repairs capitalized or expensed?
Repairs that restore something to its original condition are expensed in the year you pay for them. Work that improves an asset beyond its original condition or extends its life significantly is capitalized and added to the asset's cost.
Is software a capital expense?
It depends on how you pay for it. Software subscriptions are operating expenses deducted in the year you pay. Software you buy outright is a capital asset in Class 12, written off at 100%, subject to the half-year rule.
Are capital expenses tax-deductible?
Yes, but gradually. Instead of deducting the full cost in one year, you claim capital cost allowance (CCA) each year at the rate for the asset's class. Land is the main exception: it is never depreciated.
What is a capitalized expense?
A capitalized expense is a cost recorded on the balance sheet as an asset instead of being deducted right away, because it benefits the business for more than a year. It's then expensed over time through depreciation, which the CRA calls capital cost allowance.
A note from our CPAs: This guide is educational and covers the general rules for Canadian small businesses. Tax situations vary, so for advice on your specific circumstances, talk to your accountant. (If they use ReInvestWealth, they'll already have clean books to work from.)
Written by Behdad Karimi Dermeni, CPA
Co-founder of ReInvestWealth and a founding community builder at Stripe. Behdad built ReInvestWealth to give smart, busy entrepreneurs CPA-level accounting without the CPA-level price tag. Read more · Connect on LinkedIn
Reviewed by Maryam Ajorloo, CPA
Maryam Ajorloo is the co-founder of ReInvestWealth and a CPA who specializes in small business tax, sales tax, and everyday bookkeeping. She helps entrepreneurs keep clean, audit-ready books and make sense of write-offs, filing deadlines, and the numbers behind their business. Read more · Connect on LinkedIn
