Can I deduct the costs of my personal vehicle?
A common question asked by many individuals is whether they can deduct the costs associated with their personal vehicle on their tax return. The simple answer is...maybe. The Income Tax Act outlines strict criteria that must be met depending on the underlying source of income. This post will aim to provide a high level overview to help you navigate your own personal situation.
Considering the different sources of income
Salaried employees
If you're an employee earning a salary, you can deduct your motor vehicle expenses if you meet all of the following conditions:
- You were normally (ordinarily) required to work away from your employer's place of business or in different places.
- Under your contract of employment, you had to pay your own motor vehicle expenses.
- You did not receive a non-taxable allowance for motor vehicle expenses. Generally, an allowance is non-taxable when it is based solely on a reasonable per-kilometre rate.
- You keep with your records a copy of Form T2200, Declaration of Conditions of Employment, which has been completed by your employer.
These are the general criteria for salaried employees to be able to deduct motor vehicle expenses. Particular attention should be paid to the first criterion, as it is a common point of misconception. To claim motor vehicle expenses, you must generally first travel from your home to your employer's place of business (e.g., head office, factory, warehouse, store, etc.). From there, if you're ordinarily required to travel to different sites, the motor vehicle expenses incurred during those trips could be deductible if the other criteria are met.
For example, consider a construction site inspector who reports to his firm's head office every day and then drives to different worksites for inspections. While the drive from their home to the head office would be a personal commute, any trips to the different worksites would be work-related; as such, any motor vehicle expenses incurred for those trips would be deductible.
Conversely, consider the situation of a supply teacher who teaches at multiple different schools in any given week. Unless the supply teacher first reports to their employer's place of business (e.g., school board office), any trips from their home to the school at which they're teaching that day would be considered a personal commute. As such, they would not be able to deduct any motor vehicle expenses for those trips.
Commission employees
In general, if you are an employee who sell goods or negotiate contracts for an employer, you can deduct some amounts you paid to earn commission income. However, except for interest and capital cost allowance (CCA) on your vehicle, the total of the expenses you can deduct (not just motor vehicle expenses but all employment expenses you wish to deduct) cannot be more than the commissions or similar amounts you received in the year.
To deduct the expenses you paid to earn commission income, you have to meet all of the following conditions:
- Under your contract of employment, you had to pay your own expenses.
- You were normally required to work away from your employer’s place of business.
- You were paid in whole or in part by commissions or similar amounts. These payments were based on the volume of sales made or the contracts negotiated.
- You did not receive a non-taxable allowance for travelling expenses.
- You keep with your records a copy of Form T2200, Declaration of Conditions of Employment, which has been completed by your employer.
Sole proprietors
The criteria for sole proprietors (i.e., owners of businesses that are not incorporated) is a bit more straightforward. In general, the Income Tax Act allows you to deduct the costs of your motor vehicle if the trips were made for the purpose of earning income from a business (i.e., the trip was business related).
As is the case with employees, a trip from your home to your principal place of business (e.g., an office space you lease) would be considered a personal commute, which means the kilometres you drove would not be considered business related. Note: An exception can be made if you can demonstrate that your home, and not the office space, is actually the base of your business operations.
While there are certainly some grey areas, as long as the trip was business related (e.g., going to the store to pick up supplies, driving to a client site, etc.), you can consider those kilometers to be business related.
Rental property owners
If you own a rental property, you may also be able to deduct your motor vehicle expenses, although the CRA has published a strict list of criteria that must be met. These criteria look at the number of properties you own, the purpose of your trip, and the reasonableness of the expenses. For more information, you can review this resource published by the CRA.
Which expenses can be deducted?
The types of expenses you can deduct include:
- fuel (such as gasoline, propane and oil) and electricity
- maintenance and repairs
- insurance
- licence and registration fees
- capital cost allowance
- eligible interest you paid on a loan used to buy the motor vehicle
- eligible leasing costs
- parking costs (though these are not subject to the km percentage restriction that will be discussed later)
Note: You must have receipts for any expenses that you wish to claim.
What documentation does the CRA require?
In addition to receipts for all of the expenses listed above, the CRA requires you to maintain records of all non-personal trips you wish to claim motor vehicle deductions for. The CRA recommends the use of a logbook.
Firstly, you must record the odometer reading of each vehicle at the start and end of each taxation year.
For each non-personal trip, you must keep a log listing the following:
- date
- destination
- purpose
- number of kilometres driven
If you change motor vehicles during the fiscal period, record the dates of the changes and the odometer reading when you buy, sell, or trade the vehicle.
You may be thinking that this sounds like a lot of work and you're absolutely right, but it is necessary nonetheless. Should the CRA ever audit or review your motor vehicle deductions, it is very likely that they would be denied unless you can provide a logbook or other acceptable form of documentation showing the required information.
How much can I claim?
If you've gathered all your receipts and maintained a detailed logbook, the good news is that the hard part is over. Your motor vehicle deduction would then be calculated as follows:
(Non-personal kms / Total kms) x Total motor vehicle expenses
So if 40% of your kilometres were business related and your total motor vehicle expenses were $10,000, you would be entitled to a deduction of $4,000.
Need help determining how much you can claim?
While the CRA's general criteria are straightforward, every individual's situation is different and things can get complicated fairly quickly. Feel free to reach out today if you would like expert help from a CPA to ensure you claim the maximum amount of motor vehicle expenses you're entitled to.
