If you are considering purchasing or leasing a vehicle for work, you may be wondering if the cost is worthwhile. There are allowable automobile expenses that you can utilize as a tax deduction on your tax return if you meet certain criteria. Weighing the costs with the benefits could help facilitate the decision on whether to proceed with your purchase or lease.
Overview of Eligibility Requirements and Restrictions when Claiming Automobile Expenses
- You are working in a location other than your employer’s business or premises.
- You are the one paying for all the costs related to your vehicle.
- You must have a letter from your employer confirming you are required to use a vehicle.
- If the vehicle is also used for personal transportation, you must track the percentage of use and kilometers driven in each situation.
Qualifying for the Automobile Deduction
Perhaps the most important requirement for an automobile-related deduction is the fact you need to work in another location other than your employer’s business or premises. It is important to note that simply commuting from your home to your workplace is not considered an eligible driving expense.
For example, imagine that you are a sales representative who drives to all your customers’ venues. Your employer provides you with an office space, but you rarely work out of that space. The cost associated with travelling to visit your clients may be an allowable vehicle expense.
Another requirement for the automobile deduction is that you are responsible for paying all the costs related to your vehicle, and your employer is not. Some employers reimburse or grant non-taxable allowances. If this allowance offsets the cost of operating your vehicle, you cannot then claim employment expenses for that vehicle. The Canada Revenue Agency wants to ensure you are not double dipping in the benefits of deducting your vehicle costs.
You need to have a letter from your employer that confirms that you were required to use a vehicle. This is done in CRA Form T2200 (Declaration of Conditions of Employment).
Allowable Automobile Expenses
Allowable automobile expenses for the deduction are the costs of running and operating your car. These expenses include:
- repairs and maintenance
- fuel
- insurance
- license and registration fees
- leasing costs (if you did not purchase the vehicle)
- interest on the loans you have taken out to buy the vehicle
- the capital cost allowance.
Capital Cost Allowance
The capital cost allowance is the amount you can claim as an allowable vehicle expense.
- It essentially takes the cost you paid for the vehicle and reduces it each year by a reasonable percentage.
- This percentage is set out by the CRA based on the property.
- The reduction is the allowable expense.
- You can include in the cost of the taxes and delivery charges and any other directly related expenses to purchasing the automobile.
Personal Use of Your Automobile
Many people do not use their vehicles strictly for employment-related transportation; they also get some personal use out of the vehicles. If you are using the automobile for both work and personal transportation, you are required to track your total kilometers and the percentage that you have driven it for personal use. This calculates the allocation of your operating expenses. For example, if you have $1,000 in operating expenses and you used your vehicle 50 percent for work, you can claim $500.
Allowable Interest Expense
The CRA limits the deduction on the amount of interest paid on a loan to buy a vehicle. This amount can be calculated as either the total interest paid on the automobile or $10 (this amount varies depending on the age of the vehicle) multiplied by the number of days you used the vehicle for work. You deduct the lower amount as part of your automobile expenses.
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