Blog Posts, Tax

Can I Expense My Car?

Updated: December 29, 2022

One of the most common questions we get from business owners and individuals who are self-employed is: “I heard I can deduct car expenses for tax, how do I do that?”

In this post, we will cover which car expenses are deductible when filing your tax return.

In general, most individuals are faced with two situations when it comes to car expenses:

Using a personal car for business: In this situation, a business owner uses his/her own personal car to drive to meet clients.The car is owned by the individual.

Company owned vehicle: Your company purchases a car which is used by the business owner for work and personal purposes. In this situation, the car is owned by the company.

The first situation is simple to understand.

The second situation requires an examination of the consequences of making your company purchase a car which you will use for business trips and personal trips.

Expenses you can deduct

To get started, let’s examine which business expenses are deductible when you use your car for business purposes. You can take deductions for the following expenses for a vehicle that is used for business trips:

  • License and registration fees;
  • Fuel and oil costs;
  • Insurance;
  • Interest money borrowed to buy a motor vehicle;
  • Leasing costs;
  • Maintenance and repairs; and
  • CCA (depreciation)

Using a personal car for business

If you use your personal car for business, your expense deduction really comes down to tracking mileage.

We can’t understate this enough. YOU HAVE TO TRACK MILEAGE!!

Why is this so important? Because all of your vehicle expenses will be prorated by the number of kilometers you drive for business purposes. The best way to do this is as follows:

  • Write down the reading on your odometer on the first day of the year and at the end of the year. This way you will know how many total kilometers you drove during the year. In the US, they track using the mile, so you may see terms like “standard mileage rate” or “cents per mile”. In Canada, it’s cents per kilometer.
  • For each business trip during the year, write down the same information to determine how many kilometers you’ve driven during the year for each individual business trip
  • Divide the sum of business kilometers driven by the total kilometers driven, this will give you a percentage (%). This is the percentage of total kilometers driven during the year for business purposes only
  • You then take this percentage (%) and multiply it by the total of vehicle expenses you’re eligible to deduct as cited earlier in this blog post.

*Important*: mileage driven from your home to your place of work (office) is not considered to be a business trip.

Example

Let’s look at a simple example to understand how this works:

Joe uses his personal car for business, here is some information about mileage driven and his vehicle expenses:

  • Total kilometers driven during the year: 25,000 kms
  • Total kilometers driven for business purposes: 10,000 kms

Expenses:

  • License = $100
  • Fuel = $2,000
  • Insurance = $1,500
  • Interest on Car Loan: $3,600
  • Repairs: $2,000
  • Total = $9,200

Formula = (10,000 kms / 25,000 kms) * $9,200 = $3,680

Therefore, Joe can take a deduction of $3,680 as a result of using his personal vehicle for business trips.

Using a company car

This situation arises when a company purchases a car that is used by the owner of the business for business trips and personal trips.

Limitations on Vehicle Purchase Value

There are limitations on the value of the car a business can purchase. These limitations are as follows:

  • Max Purchase Value: $37,000
  • Max Per Month Lease Value: $1,050 + HST

The limitations above apply to both corporate-owned automobiles and to vehicles purchased by self-employed individuals.

This means that if you buy a car worth $150,000, the maximum amount can deduct will be limited to $37,000 via CCA (depreciation). The remainder, $83,000 ($150,000 – $37,000) cannot be deducted. This applies to self-employed individuals and companies.

Similarly, if you lease a vehicle, the maximum lease payment you can deduct is $1,050/month + HST. This applies to self-employed individuals and companies.

Taxable Benefit for Company-Owned Vehicle

If you’re a shareholder or employee and you use a company vehicle for personal trips, the CRA requires that you include a taxable benefit in the shareholder or employee’s income.

This taxable benefit is comprised of two components (1) a standby charge and (2) an operating benefit.

The operating benefit is included in income if the company pays for the vehicle’s operating expenses.

Standby Charge

For the purposes of this blog, we won’t cover the formula used to calculate the standby charge as any accountant could help you with this calculation, however, is it important to understand the implications of the standby charge.

The essence of the standby charge is to calculate the personal benefit to an employee of using a company-provided car for personal use.

Here are some implications you should keep in mind:

  • The standby charge is calculated using the actual value of the car. Hence, if your company bought a car for $150,000, the standby charge will be calculated using the $150,000 value and not the $37,000 limit that the company can deduct. This results in an unfavorable treatment to the company and the employee.
  • Given that a car’s value depreciates over time, you would expect the $150,000 value used in the standby charge to be adjusted. However, the CRA DOES NOT allow for changes in the value. You will be required to calculate a standby charge on the original cost of the vehicle even if the current value of the vehicle is much less than the original cost. This results in an unfavorable treatment to the employee.

Therefore, as you can probably tell, getting your company to purchase your car is not a favorable course of action due to the following:

  • Your company can only deduct $37,000 of the value or a lease payment of $1,050/month
  • If you use the vehicle for personal reasons, you will be required to pay tax on a standby charge benefit calculated on the ACTUAL value of the vehicle

Operating Benefit

If your company pays for the expenses to operate a company car, you as an employee are receiving a benefit from your company.

This benefit is calculated using a prescribed amount per kilometer driven for personal use and included in the employee’s tax return. For 2020, the prescribed amount was $0.33.

This amount is calculated without any regard for the actual operating expenses of the vehicle. This results in a favorable treatment for employees driving an expensive car with high operating costs.

If you’re an employee that used a car for business trips for more than 50% of the kilometers driven, you can elect to calculate the operating benefit as: 50% of the standby charge.

Parking

Parking paid by a company is considered to be a taxable benefit to the employee except for under the following circumstances:

  • Parking for employees with disabilities
  • Parking for employees who require a car to carry out their employment duties
  • Scramble parking

Conclusion

In conclusion, we would make the following recommendations to clients when it comes to car expenses:

  • We recommend that you DO NOT get your company to purchase a vehicle you intend to use for personal reasons
  • If you choose to take deductions for vehicle expenses, make sure that you track mileage for both business and personal use

Let us help you. Do you have questions about car expenses? Email us: info@verticalcpa.ca

The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.

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