Employment income from all sources is combined. Deductions are made against combined income.
Make sure your deductions are reasonable. Having to deal with an audit is a major pain.
The employment you earn from a paycheck with income tax, CPP etc deducted is called "Employment Income" by CRA. "Self-employment" income is whatever you earn form your business activity and is filled out on a separate form that is part of the basic CRA tax package. So you would typically declare it as "Business Income" in the "Self-Employment Income" sheet (there are also separate categories of Self-Employment Income for professionals (lawyers, doctors, dentists etc), fishermen and farmers).
On this separate form in the tax package you declare your business income and business expenses. You can deduct expenses for a business from your Business Income, but NOT Employment Income. Business/Self-employed Income is not Employment Income. You are taxed on the net combined Employment and Business Incomes, but you can only deduct Business Expenses from Business Income. If you have more expenses than you earn from your business (ie you run a business at a loss) you cannot deduct the loss from your Employment Income. You can forward the loss to next year and claim it against your next year's self-employment income (assuming you make a profit - CRA may get pissed if you claim loss after loss after loss and never make a profit from your Business Income - I think you can forward losses 2 or 3 years). Anyway, as someone suggested, if it does get complicated, hire an accountant for at the first year.
You guys seem to contradict each other a bit here, is one of you wrong or does it depend how you run things, If say I do a little bit of work in my spare time without setting up a formal business I can report some additional income and related costs, but If I form a company to do the little bit of work they become separate entities…