What Types of Car Expenses Can Business Owners Deduct

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Access to a car can be crucial to running a small business effectively.  Costs of ownership, however, can be high relative to your revenues, especially in the early stages when your business is not hugely profitable.  Luckily, Revenue Canada (CRA) and Revenue Quebec (RQ) allow both unincorporated/self employed individuals and owners/employees of corporations, who use their cars to generate income, to deduct the relevant expenses. Both CRA and RQ provide detailed guidance and have specific rules relating to the write off of car expenses.  I discuss some of the main provisions that impact small business owners in this article and provide guidance on the differences between unincorporated (self employed/small business) owners and corporations.

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General Rules for Deductibility of Car Expenses

What is the Maximum Cost Of Car That is Eligible for Tax Deduction

If you purchase your car, the maximum amount that is eligible for deduction and on which is capital cost allowance (depreciation) is claimable is $37,000 + sales taxes starting on January 1, 2024. This maximum cost was $36,000 for 2023 and $34,000 for 2022. (For many years the amount was fixed at $30,000. however, they have started to increase it on an annual basis).

What is the Portion of The Car That You Can Expense

While you may not write off the full amount of the car purchase price as an expense in the year that you buy it, you are allowed to claim the capital cost allowance on an annual basis. Capital cost allowance is essentially the term that CRA uses for depreciation rates. This CCA rate is applied to the purchase price of the car and belongs either in Class 10 if the car costs less than $37,000 in 2024 or 10.1 if the car costs more than $37,000 .

In the first year of purchase, starting in 2024, you are allowed to deduct 50% of 30% of the cost of the car up to a maximum of $37,000 due to the half year rule which only allows for 50% of maximum CCA in the year of purchase. For subsequent years the deduction is 30% of the remaining balance after deducting CCA already taken and is referred to as the undepreciated capital cost or UCC.

Example of Car Purchase tax Deduction (calculation of CCA):

If you purchase a car for $35,000, the amount that you are able to deduct is as follows:

Year 1: $35,000 X 30% (CCA Rate for Cars) X 50% (Half year rule in Year 1) = $5,250.

UCC of Car at the End of Year 1/Beginning of Year 2 = $35,000 - $5,250 = $29,750

Year 2: $29,750 (UCC) X 30% (CCA Rate for Cars) = $8,925

UCC of Car at the End of Year 2/Beginning of Year 3 = $35,000 - $5,250 = $20,825

You will see that the CCA amount for year 2 is higher than year 1 since the half year rule does not apply.

See also my article on how to do the accounting for car expenses and reflect personal use.

What is the Maximum Deductible Lease Cost

Lease costs are generally deductible up to a maximum of $1,050 per month + sales taxes = $12,600 per year starting on January 1, 2024. This maximum cost was $950 for 2023, $900 for 2022 and $800 for many years prior to 2022. So, if your Porsche costs $1,400 a month to lease, the maximum deduction is only $1,050 in 2024. CRA has an example of how this amount is determined and can be found here

Should You Lease or Buy your Car

There are a variety of factors to consider when deciding whether to lease or buy a car that you should review. Significantly, a lease generally lasts for a shorter period and the car does not belong to you at the end of the lease period (although there is often a purchase clause) whereas with a purchased car (with or without financing), you usually own the car at the end of the financing period or outright if you pay for it upfront. The choice you make is often a lifestyle one and dependent on whether you prefer to replace your car regularly or are happy with the same car for a longer period. Also, the value of the car at the end of the financing term might contribute to your decision.

What Types of Costs Relating to your Car are Deductible

Cost relating your car that can be written off as expenses include:

• lease payments

• interest on financing

• gas or fuel costs,

• insurance

• repairs and maintenance,

• license and registration fees

• drivers license

• parking

• CCA on purchased/financed cars

What is An Automobile Log and What Should Be Included

The business owner should keep an automobile log of kilometres driven for business that includes:

• name of customer, supplier or other business purpose, For example, if you drive to meet your accountant it would be considered to be deductible.

• odometer readings at the begining of the year and at the end of the year

• # of kms driven for each trip relating to business,

• date of travel.

It should be noted that when computing kilometres used for business purposes, travel from the home to your regular place of employment is not considered to be deductible. If a business owner works out of their home office then any travel from the home office would be included in the number of kms driven and counted as business travel. If, as a business owner, you have a separate office that is not your home, then the same restriction applies regarding travel from your home to your business office not being deductible travel.

Car expenses for unincorporated owners (self employed and sole proprietorships)

• Expenses relating to your car are reflected on a specific section of the T2125 schedule of your personal tax return called “motor vehicle expenses”

• ALL costs must be reduced, on a pro rata basis, by the percentage that the car is used for personal purposes. This percentage is based on the number of kilometres driven for business vs those driven for personal purposes.

  For the purposes of the T2125, you will need

  a)business kms driven during the year

  b) Total kms driving during the year

  Divide a) by b) to arrive at the business % use that can be applied to the expenses listed above.

• The cost of the car can be depreciated based on the business % used during the year up to a maximum cost of $37k (starting in 2024).

• The CCA (capital cost allowance) class for most cars is Class 10 if the car costs $37k or less OR Class 10.1 if the car costs more than $37k.

• Cars included in class 10.1 must have a separate category for each car. If you sell the car at a loss, you are not allowed to deduct the loss (known as a terminal loss). Similarly, if you sell your car at a price higher than the depreciated value (known as undepreciated capital cost or UCC), you do not have to reflect it as income (known as recapture).

• Interest expenses on the financing of a car can also be deducted.

• If you are registered for GST (and HST/QST), you can claim a portion of the sales taxes which is based on the CCA rate that you claim in each year.

• The example below shows the CCA claim in year one (incorporating the half year rule) + the amount of sales tax that can be claimed. The amount of the sales tax is simply added to the GST/HST input tax credits amount.

Advice on how to deduct car expenses for sole proprietors/unincorporated businesses

Car expenses for employees and/or owners of corporations

Corporations have more flexibility when claiming car expenses. There are three options for claiming the car expense deduction if you are an owner or employee or owner of a corporation:

Reimbursement for Per Km Rate Allowed by CRA

• The simplest option for an owner and/or employee of a corporation is to claim the per km rate allowed by Revenue Canada. For 2024 this rate is $0.70 per km for the first 5,000 kms of business travel and $0.64 per km exceeding 5,000kms. (for 2023 the rate was $0.68 per km up to 5,000 kms and $0.62 for kms exceeding 5,000 kms.)

• The corporation may pay/reimburse the employee/owner the amount calculated under this method without any tax consequences. This will also be considered to be an expense to the corporation and should be debited to the automobile/vehicle expense account.

• If this method is selected, no other expenses relating to the car may be claimed.

• The employee/owner must keep a log of kms driven for business to support the amount of kms claimed.

• Since the owner/employee only needs to keep a log of kms and not the individual expenses incurred or the total kms driven, this method can significantly reduce administration costs. Also, with this method there is no automobile taxable benefit to enter on the T4 slip and no additional taxes to pay.

Corporate ownership of Car

• The corporation may purchase the car for use by the employee or owner. In this case, the corporation can claim 100% of the expenses relating to the car including lease or interest payments and depreciation (subject to limits discussed above).

• The direct purchase of a car by a corporation results in a taxable benefit to the employee/owner for the % of personal usage of the car and must be reflected on their T4. An automobile log must be maintained that shows the percentage of personal vs business use. The taxable benefit can be calculated by using CRA’s calculator.

• If the car is used less than 50% of the time by the employee/owner the taxable benefit and resulting tax burden is significantly higher than if the per km method is used. It is therefore advisable to calculate the potential taxable benefit on a corporation owned car vs simply taking the per km rate explained above.

Fixed monthly/periodic car allowance

• A corporation may decide to give its employee(s) a fixed monthly car allowance. This will be tax deductible to the corporation, however, the full amount of the car allowance must be reported as income on the T4 for the employee.

• The employee may then deduct their expenses, listed above, on their personal tax return on Schedule T777 which is the schedule of employment expenses and has a specific section for motor vehicle expenses. Note that in order to claim the expenses, the employer must complete and sign the T2200 which shows that the employee used the car for business purposes.

Revenue Canada , while recognizing the deductibility of automobile expenses, wants to ensure that businesses don't benefit from personal use of car (since individuals who are not business owners generally don't have this option).  Ultimately, common sense should be used -  expenses incurred to earn income are deductible.  Expenses that are clearly personal in nature are not.

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