As a small business owner, having access to a reliable vehicle can make all the difference in your day-to-day operations—whether you’re meeting with clients, making deliveries, or attending industry events. But cars aren’t cheap. Between fuel, maintenance, insurance, and lease or loan payments, those costs can add up fast.
Fortunately, the Canada Revenue Agency (CRA) and Revenu Québec (RQ) allow business owners to deduct many vehicle-related expenses—provided the vehicle is used for business purposes. That said, there are some important rules to follow depending on whether you’re self-employed or incorporated. Let’s walk through what you need to know.
1. General Rules for Deducting Car Expenses
Before jumping into what you can deduct, it’s important to understand the overall framework. You can only deduct car expenses that are directly related to earning business income. That means:
- No deductions for personal use, including commuting from home to a regular workplace (unless your home is your workplace).
- You’ll need to track business vs. personal use carefully—usually through a vehicle log.
2. Buying a Vehicle for Your Business: What’s Deductible?
When you purchase a car for business, you can’t write off the full cost in the year you buy it. Instead, you claim a Capital Cost Allowance (CCA), a type of depreciation that spreads the deduction over several years.
💡 For 2024, the maximum purchase cost eligible for CCA is $37,000 plus applicable taxes.
The rate of depreciation is typically 30% per year under Class 10 (or Class 10.1 if the vehicle cost exceeds the $37,000 limit). The half-year rule applies in the first year, meaning you can only claim 50% of the regular CCA in that year.
Here’s how that looks with a $35,000 vehicle:
- Year 1: $35,000 × 30% × 50% = $5,250 (CCA deduction)
- Year 2: $29,750 × 30% = $8,925
You’ll continue depreciating the undepreciated capital cost (UCC) each year until the value hits zero or you sell the vehicle.
3. Leasing a Vehicle Instead?
Leasing can be a good alternative, especially if you prefer switching cars every few years. The good news: lease payments are deductible—up to a cap.
💡 For 2024, the maximum deductible lease amount is $1,050 per month (plus taxes), or $12,600 per year.
If your lease is higher than that, say, $1,400/month—you’ll still only be able to deduct the $1,050/month threshold.
4. What Car-Related Expenses Are Deductible?
Whether you lease or own, the following vehicle costs can typically be deducted based on your business-use percentage:
- Fuel (gas or electricity)
- Insurance
- Repairs and maintenance
- License and registration fees
- Parking (for business-related trips)
- Interest on a car loan
- CCA (if purchased)
- Lease payments (subject to caps)
- Driver’s license renewal (in some cases)
Remember: only the portion related to business use is deductible. You’ll need to calculate this based on the number of kilometres driven for business versus total kilometres for the year.
5. Tracking Your Business Use
To support your claims, the CRA requires that you maintain a vehicle log. At a minimum, this log should include:
- Date of each business trip
- Starting and ending odometer readings
- Total kilometres driven
- Business purpose (e.g., meeting with a client, visiting a supplier)
You should also record your total kilometres driven for the year (both business and personal) and keep fuel, repair, and insurance receipts in case you’re audited. A great app to help you keep track of your mileage is MileIQ.
6. If You’re a Sole Proprietor or Self-Employed
If you’re self-employed or run a sole proprietorship, you’ll report car expenses on the T2125 Statement of Business Activities as part of your personal tax return.
Your business-use percentage is calculated as:
(Business kms ÷ Total kms) × 100
For example, if you drove 20,000 km during the year and 8,000 km were for business, your business use is 40%. You’d apply that percentage to your eligible car expenses and CCA claim.
You’ll also claim GST/HST input tax credits on the same pro-rated basis if you’re registered for sales tax.
7. If You’re Incorporated
Corporate owners and employees have a few more options for deducting vehicle expenses.
Option 1: Per-Kilometre Reimbursement
The corporation reimburses the owner/employee for business kilometres driven using their personal vehicle. For 2024, the CRA-approved rates are:
- $0.70/km for the first 5,000 km
- $0.64/km after 5,000 km
This method is simple and avoids the need to track all vehicle expenses. The reimbursement is tax-free to the employee and fully deductible to the corporation—so long as a log is kept.
Option 2: Corporation Owns the Car
The corporation can purchase or lease the vehicle and deduct 100% of business-related costs. However, there’s a catch: the personal use of the vehicle creates a taxable benefit to the employee or owner, which must be reported on their T4 slip.
The CRA has a calculator to help determine the value of this benefit. It’s based on both standby charges (for personal use) and operating expenses covered by the business.
This option can work well if business use is high, but less than 50% personal use can result in a sizable taxable benefit.
Option 3: Flat Monthly Car Allowance
Some corporations pay a fixed monthly car allowance. This amount is considered taxable income for the employee, and must be reported on the T4. The employee may then deduct actual car expenses on their personal tax return—provided the employer issues a signed T2200 form confirming the car is required for work.
8. Tips from a Bookkeeper: Staying Compliant and Organized
- Keep all receipts—fuel, maintenance, insurance, etc.
- Maintain a detailed mileage log from day one.
- If incorporated, consult your accountant to decide between the per-kilometre method and corporate ownership.
- Review your vehicle use annually to ensure you’re choosing the most tax-efficient method.
Final Thoughts
Owning a car as a small business owner can be a substantial expense—but also a valuable deduction if managed properly. The key is to understand the rules, keep good records, and make decisions that align with how you operate your business.
If you’re unsure how to set things up or how much to claim, reach out to your professional bookkeeper or accountant for personalized guidance. A little planning goes a long way when it comes to maximizing your deductions and staying on the right side of the CRA.
