What Types of Car Expenses Can Business Owners Deduct

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 and Revenue Quebec allows individuals and corporations, who use their cars to generate income, to deduct the relevant expenses. Since there are many different situations that can arise with car expenses and also due to potential manipulation, both CRA and RQ provide detailed guidance on the subject.  Below are some of the main provisions that impact small business owners:

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 General Rules for Deductibility of Car Expenses

• If you purchase your car, the maximum cost eligible for deduction is $36,000 + sales taxes (starting on January 1, 2023. This maximum cost was $34,000 for 2022 and $30,000 for many years prior to 2022). In the first year of purchase you are allowed to deduct 15%(CCA) of the cost of the car up to a maximum of $36,000 due to the half year rule which only allows for 50% of maximum depreciation in the year of purchase. For subsequent years the deduction is 30% of the remaining balance.

• Lease costs are generally deductible up to a maximum of $950 per month + sales taxes = $9,600 per year (starting on January 1, 2023. This maximum cost was $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 $950. CRA has an example of how this amount is determined and can be found here

• There are Factors to consider when deciding whether to lease or buy a car

• Deductible automobile costs include:

  • lease payments

  • gas or fuel costs,

  • insurance

  • repairs and maintenance,

  • license and registration fees

  • drivers license

  • parking

• The business owner should keep an automobile log of kilometres driven for business that includes name of customer, supplier or other business purpose, odometer readings, date etc. For example, if you drive to meet your accountant it would be considered to be deductible.

• 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 computation of business 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 $36k (starting in 2023).

• The CCA (capital cost allowance) class for most cars is Class 10 if the car costs $36k or less OR Class 10.1 if the car costs more than $36k

• 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.

Car expenses for employees/owners of corporations:

Corporations have more flexibility when claiming car expenses. There are three options for claiming the car expense deduction:

1. Per Km Rate:

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

• The corporation may pay the employee/owner this amount without any tax consequences. This will also be considered to be an expense to the corporation and is entered to the car 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.

• The employee/owner can be reimbursed for this amount.

2. 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. 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 do calculate the potential taxable benefit on a corporation owned car vs simply taking the per km rate explained above.

3. 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

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.

Looking to better understand your small business taxes? Download our free small business/self employed tax return checklist.

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services.