Basics, Tax News

What Motor Vehicle Expenses Can Self-Employed Claim?

If you earn self-employed income and use your motor vehicle for the purpose of earning a profit then you will be able to claim the related business expenses on your income tax return and use them to reduce the amount of taxable business income you earned.

On line 9281 of your T2125 form, Motor vehicle expenses, you may be eligible to claim:

  • License and registration fees;
  • Fuel and oil costs;
  • Insurance;
  • Interest on money borrowed to buy a motor vehicle;
  • Maintenance and repairs; and
  • Leasing costs.

NOTE: There is no mention of claiming the cost of a motor vehicle as a deduction because that expense can only be written off over time through Capital Cost Allowance on Form T2125.

If you also use a motor vehicle for personal use

Then you can only deduct the portion of the expenses that are directly related to using your vehicle for earning income – except for parking fees and the cost of supplementary business insurance for your vehicle; you can claim the entire cost of those expenses.

For Example;

If you use your vehicle for both business and personal use and end up with a list of expenses similar to this one:

  • Licence and registration fees – $200
  • Gas and oil – $2,400
  • Insurance – $1,200
  • Interest – $650
  • Maintenance and repairs – $400
  • Total expenses $4,850

You can only claim the portion of these expenses that are directly related to business use. If you use the vehicle 40% of the time to earn income, then you can claim:

40% x $4,850 = $1,940 in business expenses

How do you know how much of your use of the vehicle was directly business-related and how much was personal?

The obvious way to do this and the way the Canada Revenue Agency (CRA) recommends is to use a logbook. The best evidence to support the use of a vehicle is an accurate logbook of business travel maintained for the entire year, showing for each business trip, the destination, the reason for the trip and the distance covered. Tying that into a calendar also helps to support a claim.

Then it’s a relatively simple matter to tally how many kilometers you drove for business purposes and how many kilometers you drove for personal reasons and calculate how much of a percentage of your vehicle use was actually directly related to earning income.

Keeping a logbook of each and every trip you make is a tedious process, and for self-employed Canadians, there is some good news on this front – QuickBooks Self-Employed has an app that takes care of the tracking of trips for you, and once you arrive at your destination, the app asks you if that trip was personal or for business.  Brilliant, eh?  Where was this when I was self-employed?

Can you claim the full leasing expenses?

No, CRA provides a new limit every year on claiming the lease expenses to prevent people from buying expensive personal cars and claiming them for business.

Leasing costs can be claimed to a maximum limit of:

  • Either $800 x taxes x number of days it was leased / 30 minus last year’s lease payments, or
  • $30,000 x taxes x lease paid in the year/list price
  • List price is the lower of the manufacture’s price or the maximum allowed cost for the taxation year.

For example;

Bill paid $14,400 in total car lease payments in the taxation year. And a total of $11,040 of lease payments in the previous year.

Assume he leased the car for 730 days in total.

The manufacturer’s list price of the car is $32,000 however, the maximum allowable manufacturer cost by CRA for this year is $35,294 + taxes (assume 15% tax rate). The CRA maximum allowable cost changes every year.

He will use 85% of the higher amount in his calculation as allowable vehicle cost = $35,294 x 1.15 x 85% = $34,499.89

He will use the lower of the following amounts for lease expense:

  • ($800 x 1.15 x 730days) – $11,040 (previous years’ payments) = $11,346.67, or
  • $30,000 x 1.15 x $14,400 (this year’s payments) / $34,499.89 (calculated earlier) = $14,400

So Joshua will report $11,346.67 for lease expenses.

Keep in mind that if you claim your vehicle’s lease expenses, you cannot claim a depreciation value for it.

What do you claim if you decide to buy instead of lease?

If you own your car, you can claim the capital cost allowance (CCA). You claim a deduction over a period of several years, based on the depreciation percentage, until it wears out or has no value left. Claiming CCA will also allow you to calculate capital gains or losses in certain conditions when you sell your vehicles. Each vehicle class has different CCA.

Class 10: used for motor and passenger vehicles that cost less than $30,000 before tax, and the depreciation rate is 30%. You can add up all vehicles in this class. You will report the fair market value (FMV) of the vehicle in the first year of use in business:

  • Passenger vehicle: claim a maximum of $30,000 + tax in the year of addition.
  • Motor vehicle: claim a maximum of $30,000 + tax in the year of addition

Class 10.1: used for motor and passenger vehicles that cost more than $30,000 before tax. Vehicles in this class are depreciated by 30% every year. Vehicles are reported on separate lines, they cannot be combined:

  • Passenger vehicles: max CCA is $30,000 + taxes even if the purchase price is higher
  • Motor vehicle: claim the full cost

So it is safe to say that:

  • If your vehicle costs less than $30,000 before taxes, regardless of the vehicle type, you report it in class 10.
  • If your vehicle costs more than $30,000 before taxes, then you report it in class 1 but you have to determine the vehicle type to know how much you can claim as cost value.
  • Passenger and motor vehicles are limited to $30,000 + taxes in both classes. And motor vehicles are limited to $30,000 + taxes in class 10 and no limit in class 10.1.

Both classes have a ½ first-year deduction. So in the first year, you can depreciate by 15% only of the cost, then, 30% in the following years.

Class 16: used for taxi vehicles. The vehicles will be used in a daily car rental business, coin-operated video games, and freight trucks. The CCA rate for this class is 40%.

Class 54 (30%): This class is used for zero-emission vehicles that would otherwise be included in classes 10 or 10.1 with the same rate of 30%. The CCA limit for this class is $55,000 (which is reviewed by CRA every year). An enhanced first-year CCA deduction is introduced in this class:

  • 100% after March 18, 2019, and before 2024
  • 75% after 2023 and before 2026
  • 55% after 2025 and before 2028

For example;

Tim bought a zero-emission car for $70,000 in 2020.

The enhanced first-year allowance that he can claim is: $55,000 x 100% = $55,000

His first year CCA is $55,000, which is also the amount of UCC at year-end.

If he sells the car for $20,000, then he should deduct part of his proceeds from the UCC = $20,000 x ($55,000/$70,000) = $15,714.29

Class 55 (40%): used for zero-emission vehicles that would normally be included in Class 16, which applies the same rules as Class 54.

Remember all your expenses need to be documented

Gas, oil changes, that windshield repair – as always, in order to claim it, you will need your receipts. Putting all your vehicle receipts in one place as soon as you get them is a good habit to get into.

More good news, as QuickBooks Self-Employed also tracks receipts, allowing the user to take a picture of the receipt and sort it as being either a business expense or a personal expense – the rest of the sorting can be done at home on your laptop or iPad.

Then, when filing your return using TurboTax Self-Employed, it will guide you through the self-employment section, T2125, and the rest of your T1 tax return to make sure you maximize all your business expenses.

TurboTax has you covered!

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