Motor vehicle tax deduction for business purposes can be claimed to minimize the taxes. However, there are certain conditions imposed by the CRA to claim these automobile expenses. In this blog, I will review the importance of record keeping of passenger automobile expenses, what expenses you can claim, what proportions you can claim, and what the expense limits are. I will also compare the deductions of these expenses in the case of a sole proprietor (individual contractor) and a corporation. Most of these rules are the same except with a small difference in cases where you are a shareholder of a corporation and the corporation owns or leased the vehicle.
CRA guide lines to deduct motor vehicle expenses for business
CRA rule dictates that you, the “taxpayer”, can deduct automobile expenses to earn business income. CRA also requires that automobile expenses must be reasonable and you have the bills/receipts to support your claim.
Who can deduct
- Self-employed, to earn business income
- A Corporation, to earn business income
- An employee, with T2200 – which is a declaration of employment expenses
Record keeping to deduct motor vehicle expenses for business
- CRA requires that in order to claim the above expenses you keep the mileage log. Keep a record of the total kilometres driven during the year and the kilometres you drive to earn business income. For each business trip, list the date, destination, purpose, and number of kilometres you drive. Record the odometer reading of each vehicle (if you are using more than one vehicle) at the start and end of the fiscal period. If you use more than one motor vehicle for your business, keep a separate record for each vehicle that shows the total kilometres and business kilometres you have driven, and the cost to run and maintain each vehicle.
- CRA allows you to maintain a simplified version of an automobile mileage log. However, you have to keep a detailed mileage log for one year to establish the base year mileage. After the base year, you can use a three-month sample logbook to foresee business use for the entire year, as long as the usage is within the reasonable range (within 10%) of the results of the base year. Businesses will have to show that the use of the vehicle in the base year remains representative of its normal use. For more information on the sample logbook policy, go to www.cra.gc.ca/autolog.
Allowable motor vehicle tax deduction for business
- Fuel charges
- Licences and registration
- Repairs maintenance
- Depreciation (certain rules)
- Monthly Lease payments (certain rules)
- Interest expense, money borrowed to buy the vehicle(certain rules)
Above expenses are deductible in proportion of business vs. personal mileage driven. For example, based on the mileage log it was determined that you drove 12,000 KMs during the fiscal period and from this 9,000 KMs are for business and 3,000 KMs are personal, so you can claim 75% of total automobile expenses for business purpose; 9,000/12,000 = 75%.
Maximum automobile deductions of passenger vehicle
A common misconception is that you may buy a luxury vehicle and write this off as an expense. Unfortunately, CRA has imposed the restriction on the maximum amount you can deduct for a passenger vehicle. According to current year rules, the maximum monthly lease payment is $800 plus taxes. If you borrowed money to finance the vehicle purchase, maximum $300 interest payment is deductible. Maximum value of the car cannot exceed $30,000 plus taxes. So if you have purchased a $80,000 car, the maximum cost you can claim is $30,000 for CCA purpose (Capital cost allowance rate is 15% in the year you bought and 30% thereafter).
The same rules as above apply to a corporation;
however, if you are the shareholder of the corporation that owns the vehicle,
CRA can assess you with the standby benefits and the operating benefits; if the
mileage shows that some mileage is for personal purpose, such as, mileage from
home to work. However, calculations and the discussion of these benefits will
be a part of another blog.