Deduction for Business
If you use your car in the course of carrying on your business, you can deduct most of your car expenses associated with the business travel. The deductible expenses include items such as:
- Repairs and maintenance;
- Leasing costs if you lease the car;
- Interest on car loan to buy the car;
- Capital cost allowance (“CCA”), which is depreciation claimed for tax purposes, if you own the car.
The last three items are subject to maximum dollar limits, as discussed in more detail below.
The amount you can deduct is pro-rated, based on your percentage of business use of the car in the year. For example, if your business use kilometres for the year are 40% of your total kilometres driven in the year, you can deduct 40% of the eligible expenses.
In this regard, the CRA allows you to use a “logbook” method under which the business use of the car can be calculated. Under this method, you must first complete one full year of a logbook of business travel to establish a “base year”. Subsequently, you can use a three-month sample logbook in any year and use that sample to determine the whole year’s business versus personal use, as long as the usage is within 10% of the results of the base year.
More particularly, the CRA requires the following under the logbook method:
- You previously filled out and retained a logbook covering a full 12-month period that was typical for the business (the “base year”). The 12-month period is not required to be a calendar year;
- A logbook for a sample period of at least one continuous three-month period in each subsequent year has been maintained (the “sample year period”);
- The distances travelled and the business use of the car during the three-month sample period is within 10 percentage points of the corresponding figures for the same three-month period in the base year (the “base year period”); and
- The calculated annual business use of the car in a subsequent year does not go up or down by more than 10 percentage points in comparison to the base year.
The business use of the car in the subsequent year is then calculated by multiplying the business use from the base year by the ratio of the sample period and base year period. The CRA sets out the formula for this calculation as follows:
(Sample year period % ÷ Base year period %) × Base year annual % = Calculated annual business use
Limit for leasing, interest and CCA
The amount you can deduct for these costs is limited to certain maximums. The maximum amounts below are reviewed by the Department of Finance every year and an announcement is made each December for the next year, but they have been unchanged since 2001 (for cars acquired or leases entered into since that year).
For lease payments, your eligible deduction is generally limited to $800 (plus applicable provincial retail sales tax, or GST/HST if you are not eligible to claim GST/HST input tax credits) per 30-day period in the year. The deductible amount may be ground down further if the manufacturer’s list price of the car exceeds $35,294 (plus the provincial retail sales tax or GST/HST where not refundable).
For interest on a car loan, the maximum amount that may be deducted is $300 per 30-day period in the year in which the loan is outstanding.
For CCA, the maximum cost that can be used as a base for claiming depreciation for tax purposes is $30,000 (plus provincial retail sales tax and GST/HST where applicable).
In each case, the deductible amount is pro-rated, again based on your business use kilometres relative to your total kilometres for the year.
Deduction for Employee
The same expenses as discussed above may be allowed to an employee who uses his or her car in the performance of employment duties.
However, the following conditions must be met:
- You must ordinarily be required to carry on the duties of the employment away from the employer’s place of business;
- You are required under your contract of employment to pay the car expenses;
- You did not receive a tax-free car allowance from your employer;
- Your expenses were not reimbursed by your employer; and
- Your employer must certify in Form T2200 that you met the conditions required for the deduction. Although the Income Tax Act specifies that you must file the form with your tax return for the year, the CRA waives this requirement, stating on the form that you only need to keep it in your records in case CRA asks for it.
As with a business, your deduction must be pro-rated based on your employment use kilometres in the year relative to your total kilometres for the year.