Did you use a vehicle for business purposes this past tax year?
If so, you’ll be able to deduct motor vehicle expenses as part of your business expenses on Form T2125 – Statement of Business or Professional Activities on your T1 income tax return.
This article explains exactly what vehicle expenses you’ll be able to deduct and what kind of documentation you’ll need to support your business expenses claim.
Note that this article deals specifically with motor vehicle expenses for sole proprietors and partnerships (who use the T1 individual income tax return); corporations can certainly claim these same motor vehicle expenses as well on their T2 corporate income tax returns.
The Two Types of Motor Vehicle Expenses
First, before you claim vehicle expenses, you need to understand that there are two types of motor vehicle expenses, broadly speaking, when it comes to income tax in Canada – those related to use of a vehicle (which you claim on line 9281 – Motor vehicle expenses) and those related to purchasing a motor vehicle (which you claim as Capital Cost Allowance).
This article covers motor vehicle expenses relating to using a motor vehicle for business purposes.
If you have bought a vehicle to use in your business or are thinking of buying one, you’ll want to also read Motor Vehicle Expenses Related to Buying a Vehicle.
(If you are a partner in a business partnership and you incur motor vehicle expenses for the business through the use of your personal vehicle, you can claim those expenses related to the business on line 9943 - Other amounts deductible from your share of net partnership income (loss) in Part 6 on page 2 of Form T2125.)
Motor Vehicle Expenses You Can Claim Related to Use of a Motor Vehicle
When you use a motor vehicle to earn business income, you can then claim:
- license and registration fees;
- fuel and oil costs;
- money borrowed to buy a motor vehicle;
- maintenance and repairs; and
- leasing costs.
But (as is almost always the case with income tax deductions), there is a catch. If you also use that same vehicle for personal use, you can only deduct the portion of the expenses above that are directly related to using your vehicle for earning income.
This means that to claim motor vehicle expenses, you need to know how many kilometres you have driven for business reasons and how many kilometres you have driven for personal use.
The cost of parking and supplementary business insurance for your vehicle are the exceptions to the “you-can-only-claim-a-portion” rule; you can claim 100% of those expenses.
So You Need to Keep a Logbook
In practice, this means that you have to keep a Logbook of all your motor vehicle use throughout the tax year, which is what the Canada Revenue Agency (CRA) recommends.
Once you’ve done it once, though, you may be able to use a simplified logbook, keeping detailed records for three months and then extrapolating your business use of your vehicle for the rest of the year. See How to Keep a Logbook to Claim Motor Vehicle Expenses for details.
How to Calculate Your Motor Vehicle Expenses Related to Motor Vehicle Use
Let’s say that you, a sole proprietor, own a van that you use for both business and personal use. You keep track of all your automobile expenses throughout the fiscal year and end up with a list of expenses that looks like this:
License and registration fees $ 175
Gas and oil $ 2,100
Insurance $ 980
Interest $ 760
Maintenance and repairs $ 650
Parking fees $ 330
Supplementary Insurance $ 500
Total Expenses $5,495
If you used your vehicle for both business and personal use, you use your kilometres driven for business purposes and your total kilometres driven to calculate how much of your automobile expenses you can claim.
For instance, let’s say that in the tax year that you incurred the automobile expenses above, you drove:
- 32,000 kilometres to earn business income
- 44,000 total kilometres
Divide your business kilometres by your total kilometres and then multiply that sum by the amount of your total “only-a-portion-allowed” allowed expenses:
(Remember: you can claim 100% of parking fees and supplemental business insurance, so remove those from your amount of expenses before you calculate!)
(32,000 business kilometres ÷ 44,000 total kilometres) x $4665 = $3,392.73
Now, because you can claim all of your parking and supplementary business insurance costs, add those in:
$3,392.73 + ($330 + $500) = $4,222.73
And you have your total claim for motor vehicle expenses; in this case, $4,222.73 which, on the T1 income tax return, is claimed on line 9281, "Motor vehicle expenses (not including CCA)", in Part 5 of Form T2125, Statement of Business or Professional Activities.
Keep All Your Receipts!
You always need receipts to back up your claims for business expenses. It’s tedious and easy to forget, but if you want to claim something, you have to have a receipt for it – even if you are NETFILING your income tax return or having it EFILED by a tax professional.
These 4 Tips for Handling Receipts will make it easier.
Also, be aware that you need to keep all your tax-related receipts for six years, just in case the Canada Revenue Agency decides they want to have a look at them.