What Automobile Expenses Can I Deduct?

By Randall Orser | Personal Income Tax

 

As a small business owner you are allowed to deduct your automobile expenses when you use your vehicle for the business. Your allowed deduction is based on the kilometers driven for the business in the year, and your total kilometers driving during your fiscal year.

You must keep a log book of your business trips with the date, destination, purpose, and kilometers driven. To keep track of your total kilometers driven for the year, note your odometer reading on the 1st day of each fiscal year before you go anywhere, and this reading gets subtracted from last year’s reading to be your total kilometers driven for the year.

Simplified logbook

You can choose to maintain a full logbook for one complete year to establish a base year’s business use of a vehicle.

After one complete year of keeping a logbook to establish the base year, you can use a three-month sample logbook to foresee business use for the entire year, as long as the usage is within the same range (within 10%) of the results of the base year. Businesses will have to show that the use of the vehicle in the base year remains representative of its normal use.

The business use of the vehicle in the subsequent year will be calculated by multiplying the business use as determined in the base year by the ratio of the sample period and base year period. The formula for this calculation is as follows:

(Sample year period % ÷ Base year period %) × Base year annual % = Calculated annual business use

Where the calculated annual business use in a later year goes up or down by more than 10%, the base year is not an appropriate indicator of annual usage in that later year. In such a case, the sample period logbook would only be reliable for the three-month period it had been maintained. For the remainder of the year, the business use of the vehicle would need to be determined based on an actual record of travel or alternative records, as discussed above. In these circumstances, the taxpayer should consider establishing a new base year by maintaining a logbook for a new 12-month period.

The expenses that are considered deductible as automobile expenses are:

  • licence and registration fees;
  • fuel costs;
  • insurance;
  • interest on money borrowed to buy a motor vehicle (for a passenger vehicle, complete “Chart B – Available interest expense for passenger vehicles” of Form T2125, as there is a limit on the amount of interest you can deduct);
  • maintenance and repairs; and
  • leasing costs (for a passenger vehicle, complete “Chart C – Eligible leasing costs for passenger vehicles” of Form T2125, as there is a limit on the amount of leasing costs you can deduct).

The amount of interest you can deduct is limited to the lesser of the following two amounts:

  • Total interest payable for the year; or
  • $10 × the number of days for which interest was payable in the year. (Use $8.33 for passenger vehicles bought between December 31, 1996, and January 1, 2001. In all other cases, use $10.00).

For leasing, you can’t just lease any old vehicle, as there are limits. For a proprietorship, your vehicle value for leasing is only calculated on $33,900 (as of 2015 tax year), so if you paid more you won’t get the full leasing costs as a deduction.

You can also claim Capital Cost Allowance (CCA) on the vehicle, and the amount is based on what percentage you’re writing off for other expenses. Also, for passenger vehicles there is also a maximum amount of the vehicle cost you can write off; if it’s classed as 10.1 Passenger Vehicle then you can only claim CCA on $30,000 maximum.

If you and another person own or lease a passenger vehicle, the limits on CCA, interest, and leasing still apply. As a joint owner, the total amount you and any other owners deduct cannot be more than the amount one person owning or leasing the vehicle could deduct.

Automobile is one of the most disallowed deductions when it comes to an audit. The main reason is that there is no logbook kept. The first thing an auditor will ask for is the logbook, and if you can’t provide it, then they just disallow all your automobile expenses. Don’t let that happen to you, and keep a logbook. It doesn’t have to be anything fancy, even a spreadsheet works.

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