If you use your vehicle to earn income, the Canada Revenue Agency (CRA) lets you claim a business tax deduction based on your mileage. To ensure you claim the correct amount, you need to track the number of kilometers you drive for both personal and business purposes. Ideally, you should use a mileage log.
What Is a Mileage Log?
Also called a logbook, a mileage log is a record of all your business travel. Every entry should detail the date, purpose of the journey, destination, and distance covered. You should also note your odometer reading at the beginning and end of the year.
Once you have your total mileage for the year and a logbook detailing your business trips, you can easily calculate which percentage of your vehicle use was for work. To explain, say the odometer reading was 10,000 kilometers at the beginning of the year and 30,000 kilometers at the end of the year. You drove 20,000 kilometers total. When you add up all the KMs noted in your logbook, you discover you drove 8,000 kilometers for business. To find the percentage of the time you used your vehicle for your business, divide the business mileage by the total mileage. In this situation, that’s 8,000 divided by 20,000, so you used your vehicle 40% of the time for business.
As a result, you can write off 40% of eligible vehicle expenses as business expenses. This includes licence and registration fees, fuel, insurance, and maintenance repairs. If you lease the vehicle, you can write off the whole cost of the lease, and if you have a loan on the vehicle, you can write off your loan interest. You can’t deduct your principal payments, but you can take a capital cost allowance. To explain how these deductions work, say you spend $1,000 on new tires. Because you use the car 40% of the time for business, you can claim a business expense deduction of $400, or 40% of the cost of the tires.
Who Needs to Keep a Mileage Log?
Anyone who uses their vehicle for business should keep a mileage log. Without a mileage log, you can’t claim this valuable deduction. You also can’t claim mileage for driving from your home to your office, but you can claim mileage for trips to conventions, going to meet clients, or travelling anywhere else for business.
You can claim the mileage deduction if you’re self-employed, meaning this deduction is available to freelancers, independent contractors and owners of unincorporated businesses. You can also claim it if you’re a partner in a partnership. In that case, you need to declare these expenses on Line 9943 (other amounts deductible from your share of net partnership income) in Part 6 of Form T2125 (Statement of Business and Professional Income).
Some employed individuals can also claim mileage, and by extension, they should also keep a logbook. To claim mileage as an employee, you need to regularly work away from your employer’s main place of business. For instance, if you’re a travelling salesperson, you may be able to claim mileage expenses. Additionally, to be eligible for this deduction, your employer must require you to cover your own motor vehicle expenses. To verify that, your employer needs to complete and sign Form T2200 (Declaration of Conditions of Employment). If your boss reimburses you for your vehicle expenses, you can’t claim mileage.
How to Keep a Mileage Log
You can keep a logbook by jotting down all the relevant information in a paper notebook or saving it in a word processing file, but you may want to use an app to streamline the record-keeping process. Remember that the CRA requires you to keep all business records for at least six years, and that rule also applies to logbooks. If you get audited, those details can be essential.
To make record-keeping easier for small business owners, the CRA also offers a simplified system. With this system, you must track every single kilometer you drive for work during the first year you use the vehicle for business. That’s considered your base year. You also need to be able to show the percentage you drove the vehicle for business in every quarter of the first year.
During the second year, you need to track mileage for a three-month sample period. To make the process as easy as possible, consider doing this during the first three months of the tax year. During this time period, track your total mileage as well as the driving you do for your business. Then, calculate the percentage of the time you used your vehicle for work, and compare that number to the percentage of time you used the vehicle for work during the base year.
To explain, say you used the vehicle for work 40% of the time in the base year. During each quarter, your business usage was as follows: 33%, 45%, 47%, and 35%. During the first three months of the second year, you drove 8,000 kilometers total and logged 4,000 kilometers for business purposes. This means you used your vehicle 50% of the time for business purposes. At this point, you need to plug those numbers into the following equation:
- (Sample Year Period % / Base Year Period %) x Base Year Annual Percentage = Calculate Annual Business Use
Because you used the first quarter of the year as your sample year period, you also need to use the first quarter of the last year as your base year period. As a result, the equation becomes (50% / 33%) x 40% = 61%.
Once you have that number, compare it to the percentage for your base year. If the number is within 10 points, you can use that figure as your annual percentage. In this situation, you used the vehicle 40% of the time for business during the base year and calculated 61% as your potential annual business use percentage. Because the number is more than 10 points away from your base year percentage, you cannot use the simplified system. You have to manually track the numbers for the rest of the year. But, here’s the good news: You can use your second year as a base year and try to move to the simplified system in your third year of business.
On the other hand, if you did all the above calculations and your number is between 30% and 50%, or 10 points lower and 10 points higher than the percentage you used in your base year, you’re allowed to use the simplified system.
If you qualify to use the simplified system, you only have to keep a detailed logbook for the sample quarter as explained above. Then, you just multiply all your allowable vehicle expenses by the simplified percentage. For instance, if you’re using 45% as your simplified percentage, you multiply your expenses by 45%.
What Happens if You Forget?
Although mileage is important to track, sometimes you may get busy or distracted and forget. In those situations, you may be able to recover your mileage using some of these tips:
- If you drive for a rideshare company, see if the company has a record of your mileage.
- Find any supporting documents that can help you figure out where you went. For example, if you were making deliveries, you may be able to check old invoices. If you were meeting with real estate clients, you may be able to check your date book to see where you went.
- Try to assess mileage after the fact. You can use Google Maps to see the distance of a particular journey.
There’s a Mileage Tracker App!
With the QuickBooks Self-Employed app, you can easily track mileage and get rid of all your cumbersome paper logbooks & be ready for tax time. Track mileage automatically with your phone GPS and categorize trips with a swipe.