Non-Deductible Expenses
A consolidated list of outlays that ITA s.18 and related sections prohibit from current deduction: personal, capital, fines, club dues, life insurance, and the 50% meals portion.
Definition
Non-deductible expenses are outlays that appear on the income statement but cannot reduce taxable income. They are added back on Schedule 1 to reconcile accounting net income to net income for tax purposes. The prohibitions are scattered across ITA s.18, s.67, s.67.1, and s.67.6. Knowing the full list is essential for accurate T2 preparation and to avoid CRA reassessment.
Key rules
- Personal and living expenses (s.18(1)(h)): outlays of a personal nature are never deductible, even if routed through the corporation. Personal meals, personal grooming, family vacations, and commuting are examples.
- Capital outlays (s.18(1)(b)): expenses on account of capital are not currently deductible. They are recovered, if at all, through CCA or on disposition. See .
- Reserves and contingent liabilities (s.18(1)(e)): accounting reserves for doubtful contingencies are not deductible except where a specific provision of the Act allows (bad debts under s.20(1)(l), doubtful accounts under s.20(1)(l)(ii), bonus accruals within 180 days under s.78).
- Fines and penalties (s.67.6): statutory fines and penalties imposed by a government or regulator are not deductible. This rule, in force for fines imposed after March 22, 2004, overruled earlier case law. Parking tickets, HST late-filing penalties, and environmental fines are denied. Interest on tax debt is also not deductible.
- Illegal payments (s.67.5): payments that would constitute bribery, kickbacks, or similar offences are non-deductible.
- 50% meals portion (s.67.1): the half of a business meal or entertainment cost that fails the 50% rule is non-deductible. See .
- Club dues (s.18(1)(l)): memberships at clubs whose main purpose is dining, recreation, or sporting, plus green fees, yacht outlays, and similar facility charges. See .
- Life insurance premiums: generally non-deductible under s.18(1)(a) unless the narrow s.20(1)(e.2) collateral exception applies. See .
- Income tax expense: federal and provincial income tax is not deductible in computing income. It is added back on Schedule 1.
- Political contributions: non-deductible as business expenses. Corporate donations to registered political parties get a federal tax credit only for individuals on T1, not for corporations.
- Charitable donations: handled as a deduction under s.110.1 for corporations rather than as a business expense; they still appear as an add-back on Schedule 1 before being deducted on Schedule 2.
- Unpaid amounts to non-arm's-length persons (s.78): bonuses and wages owing to related persons that remain unpaid 180 days after year-end are reversed into income.
Every non-deductible item must be tracked. A clean Schedule 1 reconciles accounting net income to net income for tax purposes and is one of CRA's first review points on audit.
Example
Evergreen Works Ltd. reports $220,000 accounting net income in 2026. During the year it spent $8,400 on meals (100% on income statement), $3,200 on parking tickets and a GST late-filing penalty, $4,000 on life insurance premiums, $2,600 on country club dues, $45,000 corporate tax expense, and booked a $12,000 contingency reserve.
Common mistakes
- Missing the Schedule 1 add-back for the 50% meals portion.
- Deducting CRA arrears interest. It is non-deductible.
- Treating a shareholder's personal Netflix, gym, or groceries paid by the corporation as a business expense.
- Deducting political contributions as advertising.
- Forgetting the s.78 unpaid-amounts rule for bonuses to the owner that sit on the books past 180 days.
Related concepts
Authority
- Income Tax Act s.18(1)
- Income Tax Act s.67
- Income Tax Act s.67.1
- Income Tax Act s.67.6
See also
Related entries
Business Expense Principle (ITA 18)
An outlay is deductible only if it is incurred for the purpose of gaining or producing income from a business or property and is not a personal or capital expense.
Meals and Entertainment (50% Rule)
Business meals and entertainment are generally limited to a 50% deduction under ITA s.67.1, with documented business purpose and a short list of 100% exceptions.
Club Memberships and Dues
ITA s.18(1)(l) denies deductions for membership fees at any club whose main purpose is dining, recreation, or sporting activities, even when the use is entirely business.
Schedule 1. Net Income for Tax
Schedule 1 (T2SCH1) reconciles a corporation's accounting net income to its net income for tax purposes by adding back non-deductible items and subtracting tax-only deductions.
Insurance Expense
Business insurance premiums (liability, property, E&O) are deductible, but life insurance premiums on a key person are generally non-deductible even when the corporation is the beneficiary.
This entry is for general reference. It does not constitute professional tax advice. Consult a qualified Canadian accountant for your specific situation.