Motor vehicle expenses are not added up and entered the way most costs on Form T2125 are. They go through charts. Chart A takes the year's running costs and keeps the business share. Chart B caps the interest on a loan to buy a passenger vehicle. Chart C caps what you can deduct for leasing one.
The result is that the amount you deduct depends on two things that are not printed on any receipt: how far you drove for the business, and when you bought or leased the vehicle.
How the deduction works
If you use a motor vehicle or passenger vehicle for both business and personal use, you can deduct only the part of the expenses that you paid to earn income.
Chart A finds that part. It compares the kilometres you drove to earn business income with your total kilometres for the year, and applies that share to the year's costs. Two numbers, kept all year, decide the whole calculation.
Two costs sit outside the ratio and are deductible in full: parking fees related to your business activities, and supplementary business insurance for your motor vehicle or passenger vehicle.
If you use your vehicle only occasionally for business, you can claim expenses on a per-trip basis instead.
One thing the method is not: a rate. There is no per-kilometre flat rate for the self-employed. You can deduct motor vehicle expenses only when they are reasonable and you have receipts to support them — actual costs, prorated by the kilometres in your log. That is the only method Form T2125 has.
What counts as a vehicle cost
The running costs of a vehicle you use to earn business income:
- fuel and oil
- insurance
- licence and registration fees
- maintenance and repairs
- leasing costs, which are capped for a passenger vehicle (Chart C)
- interest on money you borrowed to buy the vehicle, which is also capped (Chart B)
- electricity costs for a zero-emission vehicle
The vehicle itself is not on this list. Its cost comes off through capital cost allowance (CCA) — the way a lasting asset is written down over the years you own it — and CCA is claimed separately, on line 9936.
The caps, and the years they key to
Three of these costs are capped, and the caps move. The CRA sets a limit that changes by year; its pages give the current figures.
Interest on a passenger-vehicle loan is capped at a daily amount that depends on when you bought the vehicle. The cap is set by the year the loan was entered into, not by the tax year you are claiming in. Chart B works out the deductible interest as the lesser of the total interest payable for the year and that daily amount over the days interest was payable.
Leasing costs for a passenger vehicle are capped by a monthly limit set by the year the lease was entered into. Chart C then applies a second test, which prorates the claim using the manufacturer's list price against that year's capital-cost limit. Where a lease bundles in insurance, maintenance, and taxes, those amounts go into the lease charges in Chart C rather than into Chart A.
The vehicle's own capital cost is capped as well. A passenger vehicle costing more than the year's prescribed limit, before tax, becomes a Class 10.1 vehicle for CCA, and its capital cost is capped at that limit plus the sales tax on the limit. Zero-emission passenger vehicles, which are Class 54, have their own prescribed capital-cost cap. "Prescribed" means the figure is written in the law.
All three caps are read off the loan or lease agreement and the purchase document, and they are applied when you file.
What to keep
The logbook. This line stands on it. Keep a record of the total kilometres you drive and the kilometres you drive to earn business income. The CRA's full logbook lists, for each business trip, the date, the destination, the purpose, and the number of kilometres you drive. Those four facts are the one record no receipt can give you — you write them yourself, as the year goes, and Dossier writes this one with you, trip by trip. Record the odometer reading of each vehicle at the start and end of the fiscal period. If you change vehicles during the period, record the dates of the change and the odometer readings when you buy, sell, or trade.
The simplified logbook. You can choose to keep a full logbook for one complete year to establish a base year for the vehicle's business use. After that, a logbook kept for a three-month sample period can stand behind a later year, as long as the vehicle's use stays within the same range as the base year's results — within ten percentage points either way — and the base year remains representative of how the vehicle is normally used. If a later year drifts further than that, the sample logbook covers only its own three months, and the CRA suggests establishing a new base year with a full logbook kept for a new twelve-month period. Whether your pattern holds is a judgement made when you file — and what answers it is the log, not a guess.
The receipts. You can deduct motor vehicle expenses only when they are reasonable and you have receipts to support them, so keep the paper for fuel, servicing, insurance, licence and registration, and parking, along with the loan or lease agreement. If you use more than one vehicle for the business, keep a separate record for each.
Don't send any of it in with your return. Keep it in case the Canada Revenue Agency (CRA) asks to see it. Records and supporting documents are generally kept for six years from the end of the tax year they relate to, and a full-year logbook is kept for six years from the end of the last tax year it is used to establish business use.
Official CRA sources
- Motor vehicle expenses (not including CCA) — line 9281
- Motor vehicle records
- Motor vehicle expenses (limits and Chart B/C details)
Source: Canada Revenue Agency (canada.ca). Not tax advice.