If you’re a real estate agent, you probably spend a significant amount of time using your vehicle for work purposes. The Canada Revenue Agency (CRA) allows deductions for motor vehicle expenses that you generate when operating a car to earn income in your business. Whether you’re self-employed or a commission-based salaried employee, this self-employment advice can help you keep more of your hard-earned money at tax time.
For more on self-employment, read our guide for Canadian self-employed professionals.
Benefits of Tracking Mileage Daily
You know you need to track your time in your vehicle when it relates to business, but it’s easy to let it slip when you’re busy with so many other things. You need an accurate record of the kilometres you drive for work. If you get audited, having that record is important.
By making a consistent habit of tracking and recording your travel every day, you ensure you don’t miss any kilometres. Your records are as accurate as possible, and you don’t have to guess or think back to where you drove on each day. You have a ready-to-go record at tax time, which helps you streamline the prep process.
Here are some tips for tracking vehicle expenses and mileage.
What Kind of Vehicle Do You Drive?
A crucial component of calculating vehicle deductions is determining what kind of vehicle you drive. The CRA says two types of vehicles qualify for income tax deductions: motor vehicles and passenger vehicles. A motor vehicle is an automotive vehicle made or adapted for driving on streets and highways.
A passenger vehicle is a motor vehicle that seats a driver and up to eight passengers. If you’re driving a car, station wagon, SUV, van, or certain styles of pickup trucks, your vehicle is a passenger vehicle. The Federal government offers a vehicle definition chart on its website to help you determine your vehicle’s eligibility.
If you’re using your motor vehicle for both business and personal use, the only expenses you can deduct are those related to earning business income. However, the CRA allows you to deduct all of the supplementary business insurance for your motor vehicles and the full amount of parking fees for your business activities.
When claiming your deductions, keep in mind that they must be reasonable, and the CRA expects you to have receipts or other documentation, such as credit card statements or checking account records, for the amounts you claim. Completing “Chart A – Motor Vehicle Expenses” of Form T2125 lets you calculate how much of your motor vehicle expenses are deductible.
Owning vs. Leasing Your Vehicle
Are you driving a passenger vehicle you own or lease? You may have limits on the deductions you can take for interest, leasing costs, and depreciation, known officially as capital cost allowance (CCA). If someone else owns or leases a passenger vehicle with you, the interest, leasing, and CCA limits still apply. The total amount you and any other joint owners can deduct can’t exceed the amount a single owner or leaseholder is entitled to deduct.
Form T777 Statement of Employment Expenses helps you calculate your CCA. To claim your deductions, fill in the appropriate amounts and attach the form to your completed tax return.
Whether you buy or lease your vehicle, the CRA allows you to take the same deductions for vehicle expenses, such as oil, gas, insurance, license and registration fees, and parking costs. Say you drove 15,000 miles for business out of 30,000 miles total for the year and had $7,000 in total car expenses. You can deduct $3,500 for your business vehicle expenses.
Your expenses for vehicle maintenance and repair expenses, loan interest for vehicle purchases, or lease costs for leased vehicles are deductible too. When the CRA conducts an audit, they ask for receipts or other documents to prove your deductions.
You qualify for certain tax deductions when you’re leasing or purchasing a vehicle. You might want to consider seeking self-employed advice about buying versus leasing before you decide which way to go.
Tax Deductions When Purchasing a Vehicle
For purchases after 2018, there’s a $30,000 ceiling, plus HST, on the capital cost of passenger vehicles for CCA purposes. This ceiling limits the cost of a vehicle for which you can claim CCA for business purposes.
If you purchase a vehicle after 2018, the CRA limits your interest deduction to $300 per month. Despite these limits, you still get a tax benefit when purchasing a vehicle for business use as a self-employed person as opposed to leasing one. Self-employed people who lease their business vehicles can’t claim any CCA.
You can deduct the loan interest expense for your business vehicle purchase. To calculate how much interest expense you can deduct for your passenger vehicle, take the lesser of:
- Total interest paid in the year
- $10 times the number of days for which you paid interest on vehicles purchased after Jan. 1, 2001
When completing your tax return, enter the amounts in the Calculation of Allowable Motor Vehicle Expenses area on line 10 of Form T777, Statement of Employment Expenses, and attach it to your paper return.
Tax Deductions When Leasing a Vehicle
The CRA lets you deduct the business percentage of your vehicle lease payments. As of 2019, your deduction limit is $800 per month plus HST for your monthly lease payments, which gives you a maximum $9,600 annual tax deduction. Say you’re using your leased vehicle 75% of the time for business and your lease payment is $400 per month. You can deduct 75% of $400, which equals $300 per month, or $3,600 annually plus HST.
There’s a second, separate limit on deducting payments for automobile leases. When your vehicle’s value is higher than the capital cost ceiling, the second limit requires prorating of your deductible lease costs. You might want to review your passenger vehicle’s lease agreement to see whether it includes taxes, maintenance, and insurance. If it does, it’s wise to add them as part of your eligible leasing costs for passenger vehicles when you claim your deductions.
Mileage Tracking and Taking Deductions
Keeping track of your mileage ensures you have accurate records when it’s time to claim your tax deductions. The CRA views business travel logbooks as the best way to support claims of vehicle usage, and the agency’s self-employed advice is to create an accurate logbook for one full year of business.
It’s a good idea to start each fiscal period by recording your vehicle’s odometer reading and logging your business travel activity for a full year. A complete log includes the date and reason for every business trip, where you go, and the number of kilometres you drive. When the fiscal period ends, recording your closing odometer reading completes the log. After you’ve prepared the 12-month logbook, the CRA allows you to project your vehicle business use by using a three-month sample logbook. However, your usage must be within 10% of your base year results, and your base use must continue to be representative of your typical use.
The CRA requires you to keep your 12-month logbook for six years from the end of the tax year in which you used it last to show your business vehicle use. You can do this manually or automatically using an app like QuickBooks Self-Employed. Watch the video below to learn how to automatically track mileage.
If you sell or acquire another vehicle during the 12 months, it’s important to create a record of the dates, changes, and odometer readings for both vehicles. Do you use more than one vehicle for your business travel? You might want to maintain individual records for each vehicle and calculate your costs for them separately. Fortunately, technology has simplified mileage tracking, so you don’t have to write down odometer readings on paper.
Taking the Standard Automobile Allowance
For an alternate way to take your vehicle expense deduction, such as for gas, oil changes, maintenance, and insurance, you can opt for the standard automobile allowance rates. The rates effective for 2019 are $0.58 per kilometre for the first 5,000 kilometres you drive and $0.52 per kilometre you drive after that, which is an increase of $0.03 over the 2018 rates. You get an additional $0.04 per kilometre allowance for traveling in the Northwest Territories, Yukon, and Nunavut. These rates take into account costs associated with your vehicle ownership and operation, including fuel, financing, insurance, depreciation, and maintenance. You don’t need the actual receipts for those other items if you use the standard automobile allowance, but you do need accurate mileage records.
From mileage tracking apps to cloud payroll software, today’s technology tools offer plenty of options for enhancing your self-employment or small business enterprise. Would you like some sound self-employed advice to assist in making wise choices? 5.6 million customers use QuickBooks. Join them today to help your business thrive.