Vehicle expenses and logbook rules for self-employed people

What the CRA lets you claim

When you use a vehicle for both business and personal driving, you can deduct only the portion of the expenses that relates to earning business income. For a sole proprietor, the calculation is done on Chart A of Form T2125, and the result is carried to the motor vehicle line of that form. Each vehicle gets its own calculation.

Two things are claimed in full rather than shared: parking fees tied to your business activities and supplementary business insurance on the vehicle. Everything else is split by business use. The CRA also says expenses must be reasonable and supported by receipts, so a high percentage with no records is a weak position.

Business and personal kilometres

The split is simple in principle: business kilometres divided by total kilometres, applied to the total cost of running the vehicle. To support it, keep a record of both numbers for each vehicle. Total kilometres come from the odometer; business kilometres come from your trip records.

Here is an illustrative example with round numbers. You drive 20,000 kilometres in the year, and 12,000 of them are to earn income. That is 60%. If the eligible running costs add up to $8,000, the deductible amount is $4,800. The other $3,200 is personal and is not claimed.

Be careful about what counts as business driving. The CRA’s vehicle guidance is about kilometres driven to earn income. For employees, the CRA states plainly that driving between home and work is personal use. If your home is your place of business, or you work from several locations, the classification of a trip can be less obvious, so raise those trips with your accountant instead of guessing.

Full-year logbook

The CRA describes an accurate logbook kept for the entire year as the best evidence of business use. For each business trip, record the date, the destination, the purpose and the kilometres driven. Also record the odometer reading of each vehicle at the start and end of the fiscal period. If you change vehicles during the period, note the date of the change and the odometer reading when you buy, sell or trade.

A logbook does not need to be elaborate. A notes app, a spreadsheet or a paper book in the glovebox can work if you update it close to the time of the trip. Rebuilding a year from your calendar in March is possible, but it is slower and easier to challenge. The purpose line matters: write the client or reason, not just a town name.

Simplified logbook: base year and sample period

The CRA allows a shortcut once you have a solid base. First, keep a full logbook for one complete year to establish the base year’s business use. In a later year you can keep a three-month sample logbook instead, and use it to project business use for the full year, as long as the result stays within 10 percentage points of the base year’s annual figure. You must also be able to show that the base year still represents how you normally use the vehicle.

The formula is the sample-period percentage divided by the base-year percentage for the same months, multiplied by the base-year annual percentage. Illustrative example: your base year showed 50% business use for the year and 40% for April to June. A sample logbook for April to June in a later year shows 44%. The calculation is 44 divided by 40, multiplied by 50, which gives 55%. That is within 10 percentage points of the 50% base-year figure, so a 55% business use would generally be accepted in the absence of contradictory evidence.

If the projected figure moves by more than 10 percentage points from the base year, the base year is no longer a reliable guide. The sample log then supports only the three months it covers, and you need actual records for the rest of the year. The CRA suggests considering a new 12-month base year in that case. A change of job site, a new client area or a second vehicle are common reasons for this.

Which costs count

The CRA’s list of vehicle costs you can claim includes licence and registration fees, fuel and oil, electricity for a zero-emission vehicle, insurance, interest on money borrowed to buy the vehicle, maintenance and repairs, and leasing costs. Capital cost allowance is also available for a vehicle you own, but it is entered on its own line of the form rather than in Chart A.

Keep receipts for each category and total them by vehicle for the fiscal period. Fuel receipts are easy to lose; a business card used only for the vehicle makes the totals easier to reconstruct. The CRA’s list covers interest on a vehicle loan, not the principal you repay; the cost of the vehicle itself is recovered through capital cost allowance instead. If your business is registered for GST/HST, ask whether input tax credits apply to your vehicle costs, because the answer can depend on the vehicle and how it is used.

Passenger-vehicle limits

The CRA classifies vehicles as motor vehicles, passenger vehicles, zero-emission passenger vehicles or zero-emission vehicles, and the type affects your deduction. A passenger vehicle is generally one designed primarily to carry people and seating a driver and no more than eight passengers. Most cars, station wagons and vans, and some pickup trucks, fall into this group. Passenger vehicles and zero-emission passenger vehicles are subject to limits on capital cost allowance, interest and leasing costs. The interest and leasing limits are worked out on Chart B and Chart C of the form.

The classification of a van, pickup or sport utility depends on seating and on how much it was used to transport goods or equipment in the year you bought or leased it. The CRA’s vehicle chart covers the main cases but notes that it does not cover every situation. This article does not quote dollar limits, because the amounts depend on the year you bought or leased the vehicle, so confirm the figure that applies to your purchase or lease date before you rely on one. If you share ownership of a passenger vehicle, the owners together cannot deduct more than a single owner could.

Employees compared with self-employed people

Self-employed people deduct vehicle costs against business income. Employees are in a narrower position. An employee can generally claim motor vehicle expenses only if they normally work away from the employer’s place of business or at different locations, their contract requires them to pay their own vehicle costs, and they did not receive a non-taxable allowance. They must also have a Form T2200, Declaration of Conditions of Employment, completed by the employer.

If your employer reimburses you, or you receive a reasonable per-kilometre allowance, the conditions are not met in the usual way. An employee who received a non-taxable allowance may still claim in limited cases: the actual expenses must exceed the allowance and the allowance must be voluntarily included in income. Employees also keep a record of total kilometres and employment kilometres for each vehicle. If you are unsure which category you are in, ask before you claim.

What to bring to your accountant

Bring the logbook or trip records, odometer readings at the start and end of the fiscal period, and receipts for fuel, insurance, maintenance, licence fees, interest or lease payments. Include the purchase or lease date and the purchase price or lease terms, plus any note of how the vehicle is used.

Keep the records for six years from the end of the tax year they relate to. The CRA adds that a full 12-month logbook used as the base for the simplified method must be kept for six years from the end of the last tax year in which it was used. If you run a corporation or an unusual vehicle arrangement, mention that early, because the treatment can differ from the sole-proprietor rules described here.