By Fabio Campanella CPA, CA, CFP, CIM
Like anything with the Canada Revenue Agency, the application of the rules related to deducting auto expenses are anything but straight forward.
This article will be of interest to anyone who is self-employed and operating either a sole-proprietorship, partnership, or Canadian Controlled Private Corporation.
This article does not cover the rules specific to auto expenses deductions for employees or real estate investors.
Do you have deductible auto expenses?
The first step in the process is determining whether you have motor vehicle expenses that qualify for a deduction. Here is a list of the most common expenses:
- license and registration fees
- fuel and oil costs
- interest on money borrowed to buy a motor vehicle
- maintenance and repairs
- leasing costs
Note that the purchase price of a vehicle is NOT deductible in the year you purchase the vehicle, however, you can take Capital Cost Allowance (CCA) on the vehicle which allows you to depreciate the cost of the vehicle on a declining basis year over year.
Are you using the vehicle to generate business income?
The next step in the process is to determine what percentage of your driving relates to business use and what percentage relates to personal use. A couple of points on this:
The Canada Revenue Agency requires you to keep a trip-by-trip log of your driving outlining:
- number of kilometers you drive
Once you’ve made this determination you will tally up all your auto expenses and apply the percentage of business use to the total. Similar rules apply to HST input tax credits for HST registrants.
So how do you calculate the deductible portion of the expenses?
Frank operates a small business and owns a clothing store that has a December 31 year-end. He has a car that he uses for the business.
- Frank noted the following for the tax year:
- Kilometers driven to earn business income: 27,000
- Total kilometers driven: 30,000
- License and registration fees = $100
- Gas and oil = $2,400
- Insurance = $1,900
- Interest = $800
- Maintenance and repairs = $200
- Total expenses for the van = $5,400
Frank calculates the auto expenses he can deduct for his car for the tax year as follows:
(27,000 business kilometers ÷ 30,000 total kilometers) × $5,400 = $4,860
The deductible business part of Frank’s car expenses is $4,860.
He also has business parking fees of $40 and a supplementary business insurance cost of $100.
Therefore, he can claim $5,000
In addition to the calculation above there may be an amount available for Capital Cost Allowance or CCA but that is beyond the scope of this article.
Campanella McDonald LLP is a full-service accounting firm based in Oakville Ontario. The firm’s partners and staff concentrate on helping small businesses, independent professionals, and real estate investors maximize their bottom lines by providing specialized accounting, assurance, tax compliance, tax planning and financial advisory services.