Car-related tax deductions exist, but the rules are fairly restrictive
If you use a vehicle to earn employment or business income, the Canada Revenue Agency allows you to make some auto-related deductions on your tax return, but the government cannot be said to be generous in this area.
Those who lease a vehicle can claim lease costs of up to $800 per month. Purchasers may claim up to $300 in loan interest. Capital Cost Allowance (CCA) may also be claimed, to a maximum of $30,000, plus federal and provincial sales taxes.
These amounts are sufficient for many, but a real-estate agent or other professional who requires a high-end car may be shortchanged. A $60,000 car in Ontario, for example, costs $67,800 with tax. The maximum allowable CCA claim in the first year would be $5,670, calculated as ($30,000 + $7,800)/2 x 30%. In the second year, it would be $9,639. Were the full purchase price eligible, the cost allowance would be $10,170 in the year of purchase and $17,289 in the second year. That’s a big difference.
With these claim restrictions, the difference in terms of tax benefit between leasing and purchasing a car is negligible.
The CRA also allows taxpayers to deduct certain operating costs, but only under specific circumstances. A company employee must meet the following conditions:
– you were normally required to work away from the employer’s place of business
– under your contract of employment, you had to pay your own motor vehicle expenses
– you did not receive a non-taxable allowance for motor vehicle expenses.
Deductible expense include fuel, maintenance and repairs, insurance, licence and registration fees, plus the CCA and interest or lease payments detailed above.
Self-employed Canadians may deduct the same expenses, but are naturally not required to provide a supporting employment contract.
Employees or the self-employed must also record how much a vehicle is used for personal versus business use. This could be a list in the glove compartment or a computer spreadsheet, as long as it details the total kilometres and the kilometres driven to earn employment income. Commuting is considered personal use.
The business-kilometre percentage is then used to claim a percentage of vehicle costs. Ensure you keep all receipts and paperwork for these expenses.
The first time you claim vehicle expenses you must keep a logbook for one full year, but luckily the government introduced a simplified logbook option which can be used after that first year is recorded. The simplified option is based on a sample three-month period. But there are restrictions. For that period:
– the total and the business kilometres must be within 10 percentage points of the corresponding figures for the same three-month period in the base year, and
– the annual business use of the vehicle must not go up or down by more than 10 percentage points.
Ideally, the three months you select to use will show an increase over the base year, but one that is less than 10 per cent. If you find that use is increasing by more than 10 per cent, you have to track the entire year and thus create a new base year.
With the receipts, loan or purchase documents and the logbook requirement, there is a lot of paperwork involved in making auto claims. If you drive regularly for work, the money saved is worth the extra work, but you must ensure your records are solid.
If you need help preparing your tax return, consider an online program like H&R Block’s Tax Software (www.hrblock.ca), which will identify your tax situation and calculate deductions or credits as you go. Or if you would rather leave it to an expert, drop by an H&R Block office. A tax professional will even review your previous returns for free.
This list is compiled based on my discussions with a tax adviser at H&R Block Canada who has sponsored this blog post. The information provided here is a general list for information purposes. Taxes vary among people so always consult a tax professional for certainty. I invite you to visit hrbtaxtalk.ca to view tax queries posted by others or post your own question. Therefore, no responsibility for loss caused by any person acting or refraining from action as a result of the material contained in this bulletin can be accepted by H&R Block Canada, Inc. or Larkycanuck.com
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