Motor Vehicle Expense Rules for Canadian Business

As a small business owner, you are allowed to claim your vehicle expenses as a deduction with some conditions. Here are the rules for your vehicle.

Generally, If use your motor vehicle for the purpose of earning a profit then you might be able to claim the related business expenses on your income tax return and use them to reduce the amount of taxable business income you earned, but there are conditions.

Lately, CRA has launched Vehicle Expense Project, the main goal of this project is to deny non-allowable automobile expenses. This includes operating expenses, leases and tax depreciation.

To avoid tax complexity, many business owners eventually purchase two separate vehicles: one for personal use and one for business use. Having two cars can simplify things because there is no need to determine business related miles and personal miles. Another advantage is that all the repairs related expenses to the business vehicle can be claimed as a tax deduction.

Eligible Motor Vehicle Expense as per CRA

If you have a separate car that’s only used for business, you may be eligible to claim several different things as allowable deductions:

• ​License and registration fees

• Fuel and oil costs

• Insurance

• Interest on money borrowed to buy a motor vehicle

• Maintenance and repairs

• Leasing costs

Use of one car for personal and business use

If you are using business car for personal use, then you can only deduct the portion of the expenses that are directly related to using your vehicle for earning income – except for parking fees and the cost of supplementary business insurance for your vehicle; you can claim the entire cost of those expenses.

When it come to using one vehicle for personal use and business use, it is important to keep a logbook to differentiate between personal miles and business miles. To make your life easier, try to avoid manual logbook and opt for a vehicle logbook app instead. Many business owners do not keep proper logbook and as a result, they might be claiming much lesser deductions to avoid being audited by CRA. Having a logbook might result in higher tax deduction therefore reducing overall taxes and/or resulting in higher refund.

In Short

1. ​Keep a mileage logbook using Smartphone apps.

2. Remember to reimburse yourself with reasonable per kilometer allowances as they are tax free.

3. Review the rules which apply to you.

4. If possible avoid using business car for personal use.

Final Takeaway

If you are driving long distance for business, consider renting a car rather than driving your business car. Expenses related to renting a car for business can be used as deduction to reduce the taxable income. Another benefit of renting a car is that it will keep the extra mileage off your vehicle and reduce wear and tear.

Any questions or concerns? Get in touch. Our firm has helped many clients with maximizing tax savings by applying tax planning strategies. We will help you maximize your allowable deductions, offer alternative solutions and guide you through the complex world of income tax compliance.