If you carry on a business, you can deduct car expenses incurred in the course of earning your business income.
In some cases, if you are an employee and are required under the terms of your employment contract to use your car for employment purposes, you can deduct your car expenses in computing your employment income. You must obtain Form T2200 from your employer, indicating that you meet the Income Tax Act’s requirements. You do not get a deduction if your employer reimburses you for the costs. Similarly, you do not get a deduction if your employer provides you with a tax-free car allowance.
In either case – whether you are carrying on business or employed − the car expenses that are normally deductible include the costs of gas, oil, insurance, licenses, repairs and maintenance, and car washes.
In terms of the cost of your car, tax depreciation or capital cost allowance (CCA) is allowed at an annual rate of 30% on the declining balance. However, the CCA is subject to the one-half year rule in the year of acquisition, so only 15% is deductible in that year (so in the second year you can deduct 30% of the remaining 85%, and so on). Furthermore, the cost of the car that can be deducted is limited to $30,000 (plus any provincial retail sales tax, and GST/HST for employees or if you are not registered for GST/HST purposes). The limit is meant to prevent the deprecation of “expensive” cars, even though the limit has not changed since 2001 and is not reflective of an expensive car.
If you have a car loan (taken out to buy the car, not one you take after you already own the car), you can deduct interest on the loan, but it is limited to $300 per 30-day period in the year (roughly $300 per month).
If you lease your car, the lease costs are deductible but they are also restricted in some cases, and limited to the lesser of two amounts. The first amount is $800 (plus GST/ HST and provincial sales tax, if applicable) per 30-day period of the lease. The formula for the second amount is rather complex, but suffice to say it can reduce your deduction if the manufacturer’s list price of the car exceeds $35,294 plus the GST/HST (where you cannot recover it as a GST registrant) and any applicable provincial sales tax).
In each case, you can deduct only your business or employment use of the car, and obviously not the personal use of the car. The Canada Revenue Agency (CRA) accepts a calculation based on:(total car expenses for the year) x (business or work kilometres / total kilometres) For these purposes, driving from home to work and back is considered personal driving and not employment or business driving. You should keep records of your work and total travel.
Logbook acceptable for business
You can use a detailed logbook tracking your actual work and total kilometres travelled throughout the year. However, if you carry on business, the CRA allows a simplified method based on a 3-month sample logbook.
In order to use this simplified method you must first complete one full year of a logbook of business travel to establish a “base year”, which will be relevant for subsequent years.
After the base year, you can use a three-month sample logbook in any subsequent year and use that sample to determine the year’s business travel under the method illustrated below, as long as the usage is within 10% of the results of the base year. The CRA provides the following example to illustrate the simplified method:
An individual has completed a logbook for a full 12-month period, which showed a business use percentage in each quarter of 52/46/39/67 and an annual business use of the vehicle as 49%. In a subsequent year, a logbook was maintained for a three-month sample period during April, May and June, which showed the business use as 51%. In the base year, the percentage of business use of the vehicle for the months of April, May and June was 46%. The business use of the vehicle would be calculated as follows:
(51% ÷ 46%) × 49% = 54%
In this case, the CRA would accept, in the absence of contradictory evidence, the calculated annual business use of the vehicle for the subsequent year as 54%.