Calculate Tax Deductions for Vehicle Expenses
If you are self employed or own your own corporation, and you use your vehicle for work purposes, you are entitled to deduct a portion of your vehicle expenses from your taxable income.
Many clients ask us how to make these deductions. There are two ways in which you can deduct the expenses from income.
The first method is used if the vehicle remains in your own name.
The second method is used if the vehicle is registered to the name of your corporation.
The following is step by step instructions as to how to calculate tax deductions for vehicle expenses
A) The vehicle remains in your name. The expense is a deductible expense off of your personal taxes.
First, you must log the total business use of your vehicle (such as going to and from client meetings/site visits). Heres how:
- You must log the ‘starting km’ which is the kilometer you have right now before you started using the vehicle for business purposes. Go to your vehicle and write down the km indicated on your odometer. Moving forward, you will do this on January 1 of each year.
- For each client business use trip, you must log the kilometer distance, the date, and the client whom you went to see.
- At the end of the year, you log the ‘ending km’ which is the km it indicates on December 31st.
- First, you calculate the total km used for the year (starting km – ending km). This will be the total amount of kilometres you drove in a give year.
- Then, add up all of the km you logged for business purpose throughout the year in your vehicle log.
- Next, you figure out the percentage of business use to overall use of the vehicle. Using an example, say the total number of kilometres you drove in 2018 was 35,000km (Item D above) and say the total number of business use kilometres was 10,000km (Item E above). You divide 10,000 by 35,000 to reach the percentage of business use, which in this example would be 28% (10,000 / 35,000 = 0.28 = 28%). Now you have your percentage of business use figure.
- Next, add up all your motor vehicle expenses for the year being fuel, maintenance & repair, licence & registration, insurance, lease or finance payments. Using an example, say your total vehicle expenses add up to $10,000 for the year. You would be permitted to write off 28% of these expense as business use (using the figure from E above). This would mean $2,800.00 would be ‘written off’ as deductible from your income in that year.
If you own your own corporation, your corporation must issue you a T2200 form which allows you to use your own vehicle for the corporation’s business. As well, you will complete a T777 form which calculates the above business-use-of-vehicle expenses. These two tax forms are used to complete and file your T1 Income Tax Return during tax season each year.
The same process is used if you operate a sole proprietor. Follow the steps above and complete a T2125 Schedule to be filed with your T1 Income Tax Return at tax time.
Your tax lawyer or tax accountant can assist you with these forms.
*Note, that travelling to and from your work location is not deductible. If you drive to work each morning, you may only deduct your second trip (from your place of work to your site visit/client), and the remainder of your drives throughout the day. However, note that you are also not permitted to deduct your last trip of the day back home.
B) The vehicle is transferred to your corporation. The expense is a deductible expense off of the corporation’s taxes.
You must log the total business use of your vehicle using the same method as above. Follow steps A through G. The only difference here is that the figure in Item D and Item E above should be the same or substantially the same. That is because there should be no personal use of this vehicle if its a corporate or company vehicle. If there is some corollary personal use of the company vehicle, it should be very limited. You will likely end up with 90% or 100% vehicle deductible expense in this instance.
You complete the log, calculate the total of vehicle related expenses and send these figures to your accountant. Your accountant prepares the corporations T2 Income Tax Return and deducts the total vehicle expenses from its taxable income. In this way, this is not a personal deduction but rather, a deduction from the corporation.
The corporation will only pay tax on its net income, being its gross income minus the vehicle expenses deducted above.
Should I Do Option A or Option B?
In most cases, it is recommended to go with option A. This is because it is usually much more tax efficient for you to lower your personal income taxes rather than to lower your corporation’s taxes given that the personal rate is much higher than the corporate rate in Canada. Second, vehicles are usually held in one’s personal name. As a result, there are legal and transfer costs in transferring ownership of the vehicle to the name of the corporation. Third, if you use your vehicle for personal use, it is recommended that the vehicle is not booked as a company vehicle nor shown as a capital asset of the corporation.
Consult your Tax Professional
If you own your own business or corporation, or you are self-employed and you would like guidance on how to calculate tax deductions for vehicle expenses from your income, contact us to speak with one of our tax lawyers today. We would be happy to assist you.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law, 2020
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.