Tax Tips

What you should know about vehicle tax deductions for your small business

Canadian entrepreneurs and businesses can deduct many of the expenses incurred by operating a vehicle for business purposes. However, it is important to be aware of what the requirements for deductions are to make sure you are keeping all required logs and not deducting more than permitted.
Post by
YAC Team
July 2021
What you should know about vehicle tax deductions for your small business

Can a sole-proprietor deduct car expenses?

Yes, sole-proprietors, self-employed professionals, partnerships, and other forms of unincorporated businesses can deduct certain car expenses if the vehicle is used for business purposes.

The amount of expenses you may deduct will be proportional to the amount of time you use the vehicle for business purposes.

So, if 70% of the vehicle's mileage is logged for business purposes, you may generally deduct 70% of the associated expenses. Read below to learn more about what expenses can be deducted, and how to determine how much of your vehicle use is business related.‍

What vehicle expenses can you deduct?

In order to deduct a vehicle expense, you must use that vehicle for business purposes - that is, to earn business income. In most cases, you will be able to deduct the following expenses:

  • Fuel and oil costs
  • License and registration fees
  • Maintenance costs
  • Insurance expenses
  • Travel expenses (e.g., toll roads)
  • Parking*
  • The interest on a vehicle financing plan
  • Leasing expenses if the vehicle is leased

*For parking expenses, you can deduct the full amount if the parking is related to business use; otherwise, it is not deductible.

Can you deduct expenses on a personal vehicle?

Even if the vehicle is used outside the business, you are eligible to deduct the portion of the expenses which are directly tied to using the vehicle for business purposes.

For example, if half the vehicle's use time is for business purposes, and the other half for personal use, you can claim 50% of the vehicle's expenses.

You should use a logbook to help both determine and substantiate the business use of a vehicle %.

By accurately and carefully tracking your vehicle use throughout each quarter, you will make tax time much simpler, and avoid any complications with having to provide evidence for your claims.

Important: keep a logbook

In almost all cases where a vehicle is used for business purposes, a logbook should be kept to track the vehicle's usage. For unincorporated businesses, the logbook helps you determine the % of the vehicle's use for business purposes.

For employees using an incorporated company's vehicle, the logbook helps the company accurately generate the taxable benefit the employee is eligible for.

It is always a good idea to keep a full logbook, w complete log of all business trips and receipts of any incurred expenses.

After one year of using this logbook, you may opt for using a simplified logbook instead - read below to find out more.

What should your logbook track?

Your logbook should track each business trip taken for each vehicle used for business purposes. It should include the following information for every trip:

  • Date of trip
  • The destination of the trip
  • The purpose of the trip
  • The distance travelled

In addition to the above, your logbook should have a recorded odometer reading for each vehicle at the start and end of the fiscal period. You should also record the odometer reading of any vehicle you buy, sell, or trade at the time of the transaction.

What is a simplified logbook?

Maintaining a full logbook can be cumbersome. Fortunately, the CRA offers an alternative simplified logbook. This option is available if you choose to maintain a full logbook for one complete year, as a way of establishing a base year's business use of a vehicle.

After that initial year, you may use a simplified three-month logbook instead. You would record data in the simplified logbook just as you would in a full logbook, but only for a three-month sample period (usually, the first 3 months of your tax year).

The 10% simplified logbook rule

Note that the usage in the sample logbook must be within 10% of the base year. The CRA provides the following formula you can use to calculate the business use of a vehicle in years when you would like to use a simplified logbook:

(sample year period % / base year period %) x base year annual % = calculated annual business use

For the first part of the formula, you would use the base year period (quarter) corresponding to your sample year period. Take a look at this example to learn more:

Year 1: full logbook used to track vehicle expenses; the quarterly percentage use was 51% / 44% / 56% / 49% and the annual business use of the vehicle was 50%.

Year 2: a simplified logbook was maintained during January, February, and March, the first quarter. The % use for this quarter came out to 58%.

Based on the above, the business would plug in the following numbers into the equation:

  • Sample period % = 58%
  • Base year period % = 51%
  • Base year annual % = 50%
(58% / 51%) x 50% = 56%

In this example, since the calculated annual business use (56%) is within 10% of the base year annual use (50%), the CRA is likely to accept the simplified logbook for the year.

If the difference is larger than 10%, you would have to keep a full logbook for the remainder of the year, and that logbook can then serve as a base year for your next tax period.

Use technology to simplify your tracking

Cloud technology has made many aspects of running a business much easier - and tracking expenses is no exception. You can use an online tracking tool, such as QuickBook's Mileage Tracker App, to automatically track GPS data and record all business trips right onto your account.

If you have any questions about vehicle deductions, setting up automation, or would just like to learn more about how we can help optimize your tax planning and accounting, get in touch or schedule your complimentary meeting today.

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