Vehicle expenses can really add up. With current inflation rates and rising gas prices, it’s important to take the tax deductions you can.
The use of a personal vehicle can be tax deductible for both employees and self-employed individuals. Keep reading to learn the specifics and get the most tax deductions from your vehicle expenses.
Vehicle Expense Documentation Requirements
The Canada Revenue Agency (CRA) wants you to keep a mileage log. Almost any first review by CRA that finds no mileage log will move to disallow all vehicle expenses. On top of that, we recommend the mileage log because it’s useful in other ways.
Mileage Log for Vehicle Expenses
A mileage log needs to include the following information:
Opening Odometer Reading for the Period
Some of our customers get in the habit of writing their mileage on each gas receipt. It helps them keep track of when the next oil change or maintenance is needed.
Ending Odometer Reading for the Period
The ending mileage less the opening mileage is used to calculate the total kilometers driven for the year.
Detailed Information for Each Trip
For each trip, you should have the following:
- Date of the trip
- Departure address
- Arrival address
- The number of kilometres driven
- Reason for the trip
Without a mileage log, you will need to prove the expenses are reasonable.
It’s a good habit to keep a mileage log. It’s a lot easier than going through a CRA review, appealing a review or gathering information after the fact to prove your deductions are reasonable. And it’s a lot cheaper than hiring an accountant or worse, tax lawyer, to help you when you get into trouble.
Useful Tools to Track Mileage
There are useful tools that can help you track your mileage. Some techniques include:
Whatever tool you use, the most important thing is to build the habit of using it.
Record Keeping for Vehicle Expenses
Remember to keep your bills, receipts and mileage logs for the vehicle. When expenses are denied by CRA, it’s usually because records are not available. Keep your records for seven years from the date on your CRA notice of assessment to be safe.
How Vehicle Expenses Work
T1 Personal Tax Returns
When You Can Claim Vehicle Expenses
If you drive your personal vehicle for business purposes and keep a mileage log, you may be able to claim vehicle expenses. Your employer will need to provide a T2200 for you to claim vehicle expenses. You can’t claim vehicle expenses if your company reimburses you for your vehicle expenses or if you receive a tax-free car allowance.
Possible Vehicle Expense Deductions
- Fuel and oil
- Interest on car loans
- Licensing and registration
- Leasing costs
- Maintenance and repairs
- Other vehicle expenses
Please note that the expense must be required for the operation off the vehicle. Additions like fancy rims, tinted windows and sound systems are not deductible.
How Vehicle Expense Tax Deductions Work
Add the total kilometres driven for business purposes and divide it by the total number of kilometres driven for the year. This percentage is multiplied by your costs of operating the vehicle to provide your final deduction.
For instance, if you drove 20,000 kilometres in the year, and 10,000 kilometres are for business, you can claim 50% of your vehicle expenses.
When calculating your total vehicle expenses, there are some rules that need to be followed. It would be a good idea to work with a professional if you aren’t sure.
Shareholders of Corporations
Shareholders of corporations should also keep a mileage log. Vehicles owned by a shareholder or employee but driven for business can charge back mileage to the corporation. This means that the individual can receive compensation from the corporation for the use of their personal vehicle. It also means the corporation can take the expense related to the mileage chargeback. Under this method, all vehicle expenses should be paid by the owner of the vehicle.
CRA Prescribed Mileage Rates
CRA’s prescribed mileage rates for 2021 are:
- $0.59 per km for the first 5,000 kms
- $0.53 per km after the first 5.000 kms
CRA’s prescribed mileage rates for 2022 are:
- $0.61 per km for the first 5,000 kms
- $0.55 per km after the first 5,000 kms
For the official guidance from CRA, check out their Automobile Allowance Rates.
For example, a shareholder driving 8,000 kms for business can charge the corporation $4,540 for the use of their personal vehicle in 2021.
Company Owned Vehicles
When a vehicle is owned by the corporation, the personal use of the vehicle can result in a standby charge. It creates a taxable benefit for the person using the vehicle. A taxable benefit is taxed, but no cash is received.
If the vehicle is only used for business purposes, no standby charge would apply. There are specific rules about when a standby charge applies or does not apply. Please make sure you’re getting good advice in this realm if you drive a company vehicle.
Failure to track standby charges can result in the CRA digging into your company’s payroll accounts and record keeping.
“I can use a company vehicle for personal reasons without consequence.” There should be standby charges for the personal use of a company vehicle. Standby charges result in extra tax for the person using the company vehicle. Failure to track standby charges can result in CRA digging into your payroll accounts and assessing the corporation and the individual.
“I don’t need to keep a mileage log.” You should keep a mileage log to keep track of your vehicle use and maintenance requirements. Although it isn’t strictly required, it will make your life a lot easier when CRA comes knocking.
“Driving to and from work is a business expense.” This is not true. This is considered a commute and personal use of the vehicle.
“I can buy a Ferrari in my corporation and write it all off.” This is not true. There are upper limits to the expense that can be claimed when a vehicle is purchased or leased. The cost must be reasonable and the vehicle must be appropriate for business use. For details, it’s best to reach out to a professional.