Reasonableness of expenses (section 67)
Section 67 of the Income Tax Act says no deduction is made for an outlay or expense that is otherwise deductible, except to the extent that it was reasonable in the circumstances. It limits a deduction that another provision already allows.
Buyers and sellers can meet it when the books show expenses that look personal, one-off or unusually large. The CRA’s guide to Form T2125 for self-employed income says that generally you can deduct any reasonable current expense you incur to earn business income. Section 67 supplies the limit. See personal expenses in the books before selling.
How it works
The section is one sentence. It does not itself allow a deduction; another provision must already do that, and then s. 67 limits the amount to what was reasonable in the circumstances. The text sets no formula, so the facts of each case matter.
What to ask
- Which expense lines are for owners or their relatives, and what is the support for each amount?
- Does any amount look large compared with the work or service it paid for?
- Has the CRA questioned any expense in an audit or review?
See discretionary expenses and one-time expenses, which come up when earnings are recast.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of Canada (Department of Justice)GovernmentIncome Tax Act, section 67 (general limitation re expenses)
- 02Canada Revenue AgencyGovernmentExpenses section of form T2125
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