Operating expenses

Published Thursday 23 July 2026

Table of contents

• What are operating expenses?
• Examples of operating expenses
• Types of operating expenses
• Deductible operating expenses in Canada
• Fixed vs variable operating costs
• Operating expenses vs cost of goods sold (COGS)
• Operating expense vs capital expense (opex vs capex)
• Why operating expenses matter
• Avoid calling operating expenses overheads
• Track your operating expenses with Xero
• FAQs on operating expenses
• Related terms
• Learn more about operating expenses

Key takeaways

• Operating expenses, often shortened to opex, are the day-to-day costs of running your business, and they show up on your income statement.
• Common examples include rent, salaries and wages, utilities, insurance, and marketing, and they're usually grouped into categories like cost of goods sold and administration costs.
• The Canada Revenue Agency (CRA) lets you deduct reasonable operating expenses you incur to earn business income, but not personal or living expenses.
• Tracking operating expenses helps you protect your profit, claim the deductions you're entitled to, and stay on the right side of tax rules.

What are operating expenses?

Operating expenses, often shortened to opex, are the day-to-day costs of running your business, and they're reported on your income statement. They're the ongoing costs you pay to keep things moving, separate from the money you spend to buy long-term assets.

You subtract operating expenses from your revenue to work out your operating profit. Keeping a close eye on them is one of the simplest ways to see how efficiently your business runs.

Examples of operating expenses

Operating expenses cover a wide range of everyday costs, and the exact mix depends on what your business does. Here are some of the most common examples:

• rent
• salaries and wages
• utilities
• insurance
• office supplies
• marketing and advertising
• accounting and legal fees
• bank charges
• repairs and maintenance
• motor vehicle costs

Types of operating expenses

To make them easier to track and report, operating expenses are commonly grouped into a few broad categories. Most businesses use some version of the following:

• cost of goods sold (COGS), also called cost of sales
• selling, general and administration (SG&A)
• depreciation and amortization
• other operating costs

Interest and income taxes aren't operating-expense categories. They're usually reported separately as non-operating items below your operating income, so it's worth keeping them out of the categories above.

A couple of details help you record these correctly. Only the interest portion of a loan repayment is an expense; the principal you repay isn't. And the GST/HST you collect from customers isn't an expense either, because that money never belonged to your business.

Some categories follow strict rules, like depreciation, while others are more discretionary. The key is to be consistent so your reports stay comparable from one period to the next.

Deductible operating expenses in Canada

The Canada Revenue Agency (CRA) lets you deduct reasonable operating expenses incurred to earn business income. Personal or living expenses aren't deductible, so it helps to keep business and personal spending clearly separate.

Common deductible categories the CRA recognizes include the following:

• accounting and legal fees
• advertising
• business taxes, fees, licences and dues
• insurance
• interest and bank charges
• maintenance and repairs
• meals and entertainment (subject to a partial limit)
• office expenses
• salaries and employer contributions
• motor vehicle expenses

Fixed vs variable operating costs

Operating costs split into two types: fixed and variable. Fixed costs stay the same regardless of how much you produce or sell, such as rent and insurance. Variable costs rise and fall with your activity, such as some utilities and shipping.

Operating expenses vs cost of goods sold (COGS)

It's easy to mix up operating expenses and cost of goods sold, but they measure different things. Cost of goods sold, also called cost of sales, covers the direct costs of producing your goods or services. Operating expenses are the indirect costs of running the business, like rent and administration.

Operating expense vs capital expense (opex vs capex)

Another useful distinction is between operating expenses and capital expenses. Operating expenses are day-to-day costs you deduct in the year you incur them. Capital expenses (capex) buy longer-life assets, and you recover their cost gradually over time.

In Canada, capital assets are written off gradually through capital cost allowance (CCA) rather than expensed all at once. That's why it matters to tell the two types of spending apart before you file.

Why operating expenses matter

Operating expenses have a direct effect on your bottom line, so they're worth watching closely. There are three main reasons they matter:

• they reduce the profit you keep, so monitoring them helps you improve performance
• they lower your taxable profit when you record them correctly
• the CRA has rules for how you report them, so accurate records keep you compliant

Once you can see where your money goes, it's easier to find ways to reduce your operating costs without cutting the things that drive growth.

Avoid calling operating expenses overheads

You'll often hear operating expenses called overheads, but that word can cause confusion. People use overheads inconsistently: sometimes to mean fixed costs, sometimes to mean indirect costs. It's clearer to stick to defined operating-expense categories so everyone reads your numbers the same way.

Track your operating expenses with Xero

Xero brings your spending into one place, so you can record, categorize and review your operating expenses as they happen. You get a real-time view of where your money goes, which makes it simpler to spot savings and stay ready for tax time. See how Xero can help you stay on top of your expenses and get one month free.

FAQs on operating expenses

Here are answers to some frequently asked questions about operating expenses to help you record and report them with confidence.

Is depreciation an operating expense?

Yes, depreciation and amortization are operating expenses. They spread the cost of your assets across the years you use them.

Is interest an operating expense?

No, interest is usually treated as a non-operating expense reported below operating income. Only the interest portion of a loan counts as an expense, not the principal you repay.

What's the difference between operating expenses and COGS?

Cost of goods sold covers the direct costs of producing your goods or services. Operating expenses are the indirect costs of running the business, like rent, insurance and administration.

Are operating expenses tax-deductible in Canada?

Yes, as long as they're reasonable and incurred to earn business income. Personal or living expenses aren't deductible.

Related terms

• Expense
• Overhead
• Opex vs capex
• Operating profit
• Cost of sales

Learn more about operating expenses

• Small business expenses
• Business cost saving ideas
• Capital cost allowance for small businesses
• How to track business expenses