Startup Costs and Pre-Opening Expenses in Canada: What You Can Deduct and How to Record It

Before your first sale, you've probably already spent money: incorporation fees, a laptop, a website, a lease deposit, equipment, inventory, maybe a trip to a trade show. How those costs are treated depends on when your business started, what you bought, and whether you're a sole proprietor or a corporation. Getting the opening entries right sets up your books for years, and it can recover GST/HST you might otherwise lose.

This guide explains CRA's approach to when a business starts, how pre-opening and incorporation costs are treated, how GST/HST registration timing affects input tax credits, and how to record money the owner spent personally before the business had a bank account. It's based on CRA's guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income, CRA's guidance on capital cost allowance, and CRA's GST/HST pages. It includes worked examples, an opening balance sheet and common mistakes.

When does a business start?

The date matters because, generally, you can deduct expenses incurred to earn income from a business once that business has started. CRA looks at the facts, such as whether you've made a significant commitment of time and money, had a business plan, acquired the equipment and space you need, registered, and started marketing. A business can start before the first sale. If you've signed a lease, bought equipment and are actively getting ready to open, the business may well have started.

Costs incurred while you're only investigating whether to start a business, such as researching a market before deciding anything, may be treated differently. Your accountant will look at the timeline.

Typical timeline

Current expenses vs capital purchases

Pre-opening costs fall into the same two groups as any other spending:

Incorporation costs

If you incorporate, the legal and government fees to set up the corporation are incorporation expenses. Under paragraph 20(1)(b) of the Income Tax Act, the first $3,000 of incorporation expenses can generally be deducted as a current expense, and amounts above $3,000 are added to Class 14.1 (5% declining balance).

Worked example 1: incorporation costs

Example numbers for illustration only.

Annual filing fees after incorporation are regular current expenses.

GST/HST: register early to recover more

Whether you can recover GST/HST on startup purchases depends on your registration date.

• You can generally claim ITCs only for GST/HST paid or payable on or after the effective date of your registration.
• There's a special rule under section 171 of the Excise Tax Act for small suppliers who become registrants: property such as inventory and capital property (equipment) you still hold on the registration date for use in commercial activities is treated as bought at that date, and you can generally claim an ITC for its basic tax content. That's the GST/HST originally paid, reduced for any drop in the property's value (depreciation), and subject to the normal ITC limits. Services and other consumed expenses from before registration generally don't qualify.

Small suppliers (under $30,000 in taxable sales) don't have to register, but voluntary registration before you start spending can let you recover GST/HST on startup costs. The tradeoff is that you then have to charge GST/HST and file returns. Talk to your accountant before deciding.

Worked example 2: registering before vs after purchases

Example numbers for illustration only.

A new Ontario business spends the following before opening:

You still need invoices with the required information to support each ITC. For purchases of $500 or more, the invoice should show your business name.

When the owner paid personally

Most new businesses pay startup costs from the owner's personal account or card before the business bank account exists. Those costs still belong in the business books.

Sole proprietor

For a sole proprietor, there's no separate legal entity. Record the expenses or assets and credit owner's contribution (equity).

Corporation

For a corporation, costs paid personally by the shareholder are generally recorded as a shareholder loan owed by the corporation to the owner. The corporation can repay it later without it being taxable to the owner, since it's a repayment of money lent. Keep the receipts.

Worked example 3: opening entries for a new corporation

Example numbers for illustration only.

Before the corporation's bank account opened, the owner paid personally:

If the corporation was registered for GST/HST from its start date:

The owner also contributes $100 for common shares when the bank account opens:

Opening balance sheet

After the opening entries, a simple balance sheet might look like this:

Startup losses

Many businesses lose money in the first year because of startup costs. That's normal. For sole proprietors, a business loss can generally reduce other income in the same year, such as employment income, and unused non-capital losses can generally be carried back three years or forward 20 years. For corporations, losses stay in the corporation and can be carried back three years or forward 20 years against the corporation's income. CRA may question losses if there isn't a reasonable expectation of profit or a genuine commercial activity, so keep your business plan and records.

Worked example 4: a sole proprietor's first year

Example numbers for illustration only.

Choosing a fiscal year-end

Sole proprietors generally have to use a December 31 year-end. A corporation can choose any fiscal year-end, as long as its first tax year is no longer than 53 weeks. Choosing a year-end outside your busiest season can make year-end work easier for you and your accountant. Pick the date when you incorporate and record the opening entries in that first fiscal year, so pre-opening costs aren't split awkwardly across two years.

Startup bookkeeping checklist

Common mistakes

• Not recording personally paid startup costs.
• Registering for GST/HST too late and losing ITCs on services.
• Expensing equipment instead of capitalizing it.
• Treating lease deposits as rent.
• Mixing personal and business spending after the business account opens.
• No receipts for early purchases.
• Forgetting the $3,000 incorporation expense rule.

How Accelo can help

According to its website, Accelo Bookkeeping assigns a dedicated bookkeeper who stays on your file, with a reviewer closing each month. Catch-up bookkeeping covers missed months up to an entire year, oldest first, which helps if your startup months were never recorded. Starter is $199/month (first month free, under 100 transactions a month). Growth is $349/month and adds accrual accounting and unlimited messaging. Nothing renews on its own, and you own your records. See Accelo pricing.

Frequently asked questions

Can I deduct expenses before my first sale?

Generally yes, if the business has started. CRA looks at factors such as commitment of time and money, a business plan, and acquiring space and equipment.

Are incorporation costs deductible?

The first $3,000 of incorporation expenses is generally deductible as a current expense; the rest goes to Class 14.1.

Can I claim GST/HST on purchases before I registered?

Generally only for inventory and capital property still on hand at registration, not for services or consumed items.

I paid startup costs with my personal card. What do I do?

Record them in the business books, with a credit to owner's contribution (sole proprietor) or shareholder loan (corporation), and keep the receipts.

What happens to a first-year loss?

A sole proprietor can generally deduct it against other income in the same year. Unused losses can generally be carried back three years or forward 20.

Conclusion

Your first entries shape your books for years. Pin down your start date, separate capital and current costs, register for GST/HST at the right time, and record every dollar you spent personally. For a clean start and monthly books after that, begin with Accelo Bookkeeping.

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