ITCs on vehicle and home office expenses: what you can claim

Who can claim, and what the CRA expects

Only a GST/HST registrant can claim input tax credits (ITCs). If you are a small supplier who has not registered, the tax you pay on vehicle and office costs is simply a cost. Our HST registration checker can help you see which side you are on, and the article on start-up costs explains tax paid before you registered.

For a registrant, the CRA sets out several conditions. The purchase must be for use in your commercial activities, the tax must have been paid or be payable, you need adequate documentation before you claim, and you must claim within the time limit. For most registrants that limit is generally four years after the period in which the credit could first be claimed. The expense must also be reasonable in quality, nature and cost for your type of business.

Running costs for a vehicle

Fuel, maintenance and repairs, and licence and registration fees follow the general operating-expense chart. If the vehicle is used 90% or more in your commercial activities, you can generally claim the full tax. Between more than 10% and less than 90%, you claim the business share. At 10% or less, there is generally no ITC for most businesses.

The percentage should come from the same distance records you keep for income tax. Our article on vehicle expenses and logbook rules explains how to build that record; the point here is that the kilometres decide the credit as well as the deduction. A vehicle that is 60% business gives you 60% of the tax on fuel and repairs, not all of it.

Meals and entertainment have their own limit. For most businesses the ITC on reasonable meals and entertainment is 50% of the tax, in line with the income-tax limit described in our meals article.

Buying a passenger vehicle

The purchase itself is treated as capital property, and the rules are tighter. The CRA’s chart for passenger vehicles works by business-use percentage and by who you are. For a corporation, the ITC is generally nil at 50% business use or less, and full above that, subject to the cost limit. For an individual or partnership, the ITC is generally nil at 10% or less, full at 90% or more, and in between it follows the capital cost allowance (CCA) you claim for income tax.

In that middle range, the CRA’s method for an individual who paid 13% HST in Ontario is the CCA claimed multiplied by 13/113. Because only the business part of the CCA counts, a 70% business vehicle produces a smaller credit than the full tax paid, and the credit arrives year by year as you claim CCA.

The cost of a passenger vehicle is also capped for ITC purposes, with a lower rate for leases, and the cap is set by purchase year. Check the current figure on the CRA page before you buy, because it changes over time. Our article on vehicle expenses and logbook rules covers the matching income-tax limits.

Home office: the test comes first

The CRA allows ITCs on home office costs only if the workspace is your principal place of business, or it is used 90% or more to earn business income and is used regularly and continuously to meet clients, customers or patients. This mirrors the income-tax test for business-use-of-home expenses, so a corner of the spare room used for admin may not qualify for either.

If you do qualify, the ITC applies to eligible operating costs, such as utilities and maintenance, but the CRA lists them as expenses that must still relate to your commercial activities. Check each invoice to see whether any GST/HST was actually charged, because there is nothing to claim on a cost that carried no tax. Our article on home office expenses for self-employed people covers the income-tax side and which costs are generally eligible.

Work out the business share fairly

The CRA asks that the method you use to find the business percentage is fair and reasonable, and applied consistently through the year. For a home workspace, floor area as a share of the whole home is a commonly used method. For a vehicle, business kilometres over total kilometres is the natural one.

An illustrative example, with round numbers. A registrant in Ontario pays $1,130 for fuel in a year, which includes $130 of HST. If business kilometres are 60% of the total, the ITC on fuel is $130 × 60% = $78. Separately, if the home workspace meets the test and takes up 15% of the floor area, a $565 utility bill that includes $65 of HST would give an ITC of $65 × 15% = $9.75. The figures are illustrative only.

Pick the method before you start claiming and keep to it. Switching between methods when one gives a larger credit is hard to defend.

If you pay an employee or partner

A corporation that reimburses an employee for vehicle costs, or pays a vehicle allowance, may also recover tax. The CRA lists motor vehicle expenses and work space in the home among the items for which an ITC may be possible on reimbursements and allowances.

For an allowance, the CRA’s general conditions are that it is reasonable, would be deductible for income tax, and covers expenses that would have qualified for ITCs if you had paid them yourself. For other expenses, at least 90% must be incurred in Canada, unless the allowance is for the use of a motor vehicle in Canada. Our articles on gifts and perks and on company cars versus allowances cover the payroll side. Keep a written record of what each employee received and how it was calculated.

Records and common mistakes

The documentation needed depends on the size of the purchase. For a sale under $100, the supplier’s name, the date and the total are enough. From $100 to $499.99, you also need an indication of the GST/HST charged and the supplier’s registration number. At $500 or more, the buyer’s name, a brief description and the terms of payment are added. Keep the supplier’s receipt or invoice, not only a card or bank record.

Common mistakes include claiming 100% of fuel on a car that is used for both purposes, claiming home office tax without meeting the test, claiming the full purchase tax on a vehicle that follows the CCA method, and not keeping the distance record. The quick method of accounting also changes things: registrants using it generally cannot claim ITCs on operating expenses, though they may still claim on purchases such as vehicles that qualify for CCA.

What to bring to your accountant

Bring your distance record or logbook, the purchase or lease agreement for any vehicle, the date you registered for GST/HST, and receipts that show the supplier’s registration number. For the home, bring the floor-area figures and a note of how you use the space with clients.

Ask whether you are an individual or a corporation for ITC purposes, whether the quick method applies, whether the vehicle’s cost cap is in play, and whether past returns missed credits you can still claim. Our GST/HST service covers preparing and filing the return itself.