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How to claim motor vehicle expenses for your business in Canada?

If your business uses a vehicle to earn business income, you can deduct some or all of the related vehicle expenses. Entrepreneurs frequently ask us what the best way is to write off automobile expenses in their companies. This article explores the various options ranging from company use of owner or employee-owned vehicles, to companies buying or leasing vehicles. We then review the benefits that must be calculated and included an in employee’s or owner’s personal income under these scenarios.

This article is directed to owner-managers who own shares of corporations, and their employees. While there may be some overlap in concepts, different rules apply to proprietors, commission-based employees, and un-incorporated partners in a partnership.

We will focus in three main areas and then discuss the various other considerations when claiming motor vehicle expenses in Canada. The three ways to write off business use of a vehicle in a corporation are:

  1. Employee / owner owned vehicles used for business purposes,
  2. Company owned vehicles,
  3. Company owned lease vehicles.

How to write off owner or employee-owned vehicles?

Automobile allowances are payments that employees receive from an employer for using the employee’s vehicle during the course of their office or employment. Many owner-managers of small businesses use this method of accounting business use of their personal automobiles because it is the easiest way to account for automobile expenses. Under this method, the owner or employee doesn’t have to keep track of the various expenses of the vehicle, aside from maintaining a proper travel log. They can be simply be reimbursed using the CRA’s Automobile Allowance Rates. 

Under this “owner-owned” method, the owner buys a car personally, and then keeps a log of the KM’s that they’ve driven for business purposes. The employee or owner then multiplies their KMs x the CRA approved Automobile Allowance Rates to arrive at an amount that they can be reimbursed from their corporation. The allowance rate is meant to cover all automobile related expenses such as fuel, interest/lease payments, repairs and maintenance, insurance, and all other expenses incurred to operate the vehicle and, as you’ll see below, has been steadily increasing with inflation in recent years. The reimbursement is deductible to the corporation, and not taxable to the owner or employee.

It should be noted that this method is not available to proprietorships or partnerships with individuals as partners.

2024 CRA per-kilometer allowance rates

The CRA sets specific per-kilometer rates for vehicle allowances. These rates vary based on the year and location.

How to write off company owned vehicles?

Companies that require their employees to travel a lot, or need to transport tools, personnel, and equipment may consider buying company vehicles for employees to carry out their duties.

Under this scenario, companies will purchase a vehicle and then depreciate the cost of the vehicle over several years using Capital Cost Allowance (or “CCA”, which is a fancy term for tax depreciation). In other words, the entire cost of the vehicles is generally written off over a number of years, the speed and timing depend on their classification for tax purposes.

We will cover the CCA of internal combustion engine (“ICE”) powered vehicles and electric vehicles separately.

CCA (tax depreciation) for ICE vehicles

The purchase of a vehicle will fall into one of four categories, which determine how a vehicle’s cost is written off in the company.

The four categories are:

  1. Motor Vehicle,
  2. Passenger Vehicle,
  3. Zero-emission passenger vehicles (ZEPV – a zero-emission vehicle that would otherwise be classified as ‘passenger’ vehicle),
  4. Zero-emission vehicles (ZEV – a zero emission vehicle that doesn’t meet the definition of a passenger vehicle).

The CRA has published the following chart on its website to help you to determine if you have a motor vehicle or a passenger vehicle. The chart does not cover every situation, but it covers the main definitions for vehicles bought or leased and used to earn business income. Zero-emission passenger vehicles (ZEPV) and Zero-emission vehicles (ZEV) have different tax treatments and are covered in the next section.

 

Type of vehicle

Seating (includes driver)

Business use in year bought or leased

Vehicle definition

Coupe, sedan, station wagon, sports car, or luxury car

1 to 9

1% to 100%

passenger

Pick-up truck used to transport goods or equipment

1 to 3

more than 50%

motor

Pick-up truck (other than above) (1)

1 to 3

1% to 100%

passenger

Pick-up truck with extended cab used to transport goods, equipment, or passengers

4 to 9

90% or more

motor

Pick-up truck with extended cab (other than above) (1)

4 to 9

1% to 100%

passenger

Sport utility used to transport goods, equipment, or passengers

4 to 9

90% or more

motor

Sport utility (other than above)

4 to 9

1% to 100%

passenger

Van or minivan used to transport goods or equipment

1 to 3

more than 50%

motor

Van or minivan (other than above)

1 to 3

1% to 100%

passenger

Van or minivan used to transport goods, equipment, or passengers

4 to 9

90% or more

motor

Van or minivan (other than above)

4 to 9

1% to 100%

passenger
  1. A vehicle in this category that is used more than 50% of the time to transport goods, equipment, or passengers while earning or producing income, at a remote work location, or at a special work site, that is at least 30 kilometers from the nearest community with a population of 40,000, is considered a motor vehicle.

The entire cost of motor vehicles is included in CCA class 10 and depreciated at a rate of 30% / year on a declining balance basis.

Passenger vehicles are included in either CCA class 10 OR CCA class 10.1, which is also depreciated at a rate of 30%. Class 10.1 is reserved for passenger vehicles with a cost (before sales tax) higher than the CRA’s published ceilings, which is the maximum amount that you can write off for passenger vehicles in your company, regardless of their purchase price. Passenger vehicles whose purchase price falls below those ceilings are included in Class10. In other words, the CRA limits the amount that companies can write off for passenger vehicles.

The Class 10.1 ceiling was stuck at $30k since 2000, but after 22 years, it has started increasing, as follows:

  • 2024 Class 10.1 CCA ceiling $37,000 before tax
  • 2023 Class 10.1 CCA ceiling $36,000 before tax

Accelerated CCA (tax depreciation) for Zero-emission vehicles and Zero-emission passenger vehicles

Zero-emission vehicles and passenger vehicles can be included in CCA class 54 which is also depreciated at a rate of 30%, however class 54 allow you to claim 75% in the first year for vehicles purchased during 2024 and 2025, and 55% for vehicles purchased in 2026 and 2027. Further, the limit ceiling for Class 54 is increasing:

  • 2024 Class 54 ceiling $61,000 before tax
  • 2023 Class 54 ceiling $59,000 before tax

How to write off company leased vehicles?

Automobile lease payments are written off as they are incurred. Leasing costs relating to motor vehicles are generally deductible with some minor limitations, while lease payments for passenger vehicles are subject to certain other limitations.

Generally, automobile leases have the following limits:

  • 2024 lease payment ceiling $1,050/mo before tax
  • 2023 lease payment ceiling $950/mo before tax

For passenger vehicles, the company must perform an analysis related to the number of days leased, the manufacturer’s list price, and the upper CCA limit in that year for Class 10.1. You can see a sample calculation on the CRA’s website here.

How to write off automobile interest and operating costs?

In addition to the capital costs or leasing costs covered above, automobiles have a variety of additional costs which can be expensed in the company, such as:

  • Fuel or electricity
  • Insurance
  • Repairs and maintenance
  • Interest (subject to the CRA’s ceilings on interest deductions)
    • 2024 interest ceiling $350/mo before tax
    • 2023 interest ceiling $300/mo before tax
  • License and registration

These expenses are claimed in the corporation that owns or leases. The corporation must maintain adequate records to support the claims for these expenses.

Where a corporation is reimbursing an employee or owner using CRA’s per-kilometer allowance rates (discussed above), neither the employee nor the corporation need to keep track of the above noted expenses, as the per-KM allowance rate is meant to capture all vehicle related expenses. The employee or owner does, however, need to maintain a KM log.

What records do you need to keep?

To support the amount you or the company can deduct, you need to keep a record of both the total kilometers you drive and the kilometers you drive to earn business income. The best way to do this is to keep a logbook for each vehicle you use for your business, and record the following information for each trip:

  • date
  • destination
  • purpose
  • number of kilometres you drive

You also need to record the odometer reading of each vehicle at the start and end of the fiscal period. If you change vehicles during the fiscal period, record the dates of the changes and the odometer readings when you buy, sell, or trade the vehicles.

What is a “simplified logbook”?

Employees and owners may be eligible to maintain a ‘simplified logbook’.

After one complete year of keeping a logbook, you can use a three-month sample logbook to estimate the business use for the entire year, as long as the usage is within the same range (within 10%) of the results of the base year. You can find more details on how to use the simplified logbook method on the Canada Revenue Agency website.

Logbook Apps

There are several apps that can help maintain a logbook and can be exported to except to provide to you accountant at yearend. While we don’t have ties to or promote any particular app, we’ve seen MileIQ and MileBug working well.

For owners or employees who receive an automobile allowance calculated using the CRA’s automobile allowance rates, this is all they need to keep.

For companies or proprietors who own vehicles, they also need to keep all the receipts and invoices for the vehicle expenses they incur, such as gas, oil, repairs, maintenance, insurance, license, registration, interest, and leasing. Make sure the receipts show the date, the amount, the type of expense, and the name of the vendor. If you use a credit card statement or a cancelled cheque as a receipt, you also need to keep the invoice or voucher to show what the payment was for.

How to calculate benefits on personal use of a company vehicle?

There are two types of benefits which owners and employees must include in their income when they use a company vehicle for personal purposes. They are the Standby Charge and Operating Benefits.

The Standby Charge is meant to cover the benefit relating to the capital or leasing cost of the vehicle, while the Operating Benefit is meant to cover the benefit relating to the costs of operating the vehicle, the two benefits must be calculated separately and added together to arrive at the employee or owner’s taxable benefit. The formula for calculating automobile benefits is A + B = C

A = Total calculated Standby Charge

B = Total calculated Operating Benefit

C = Taxable benefit to be included in the employee or owner’s income for personal use of a company owned or leased vehicle.

We could provide further details on how the standby charge and operating benefit are calculated, however the CRA already has great resources, as well as an automobile benefits calculator (which we frequently use for calculating our client’s benefits.

Here are the links to information and the CRA’s automobile benefits calculator:

Leasing vs. buying a vehicle

We are frequently asked if it is better for an entrepreneur to buy the company and charge KMs to their corporation, or for the corporation to buy or lease the vehicle directly. As with many things in tax, the answer is “it depends on your particular facts and circumstances”.

We find that the question is mostly tax motivated, “which scenario helps me pay the least amount of tax”. Notwithstanding the below points, the tax rules are typically setup to arrive at approximately the same result under each scenario if the business owner and their accountant execute their tax reporting obligations properly, so while there are certainly some timing differences between the timing of the taxation years in which the tax benefits are received, in the end the owner and company generally arrive at the same point under each scenario.

While tax is important, non-tax considerations are likely more relevant in determining which option is best for you. Here are some non-tax issues to consider when purchasing a vehicle for business use:

Record keeping and reporting burden

As we’ve seen above, corporations that own vehicles have a heavy burden for maintain adequate expenses and KM log records as well as maintaining a variety of calculations relating to leases, and employee benefits that make owning vehicles burdensome. Notwithstanding the following points, in most owner-manager scenarios we recommend owning the vehicle personally and charging KMs back into the company for simplicity and reduced compliance burden.

What’s the best deal, financially speaking?

Let’s assume the company (or the employee / owner) is going to purchase the vehicle and the choice is to buy vs lease. The choice would generally come down to what is the better business deal, with the highest residual value and lowest interested rates compared to the payments made. This analysis needs to be performed on a “case-by-case” basis. Be careful not to be fooled by “0%” interest deals as there is usually an imputed interest rate build into the purchase price of the automobile. To determine what this rate is, ask what the ‘cash purchase price is’ if you were to pay cash rather than finance the automobile. It’s usually a few thousand dollars lower. The difference is, effectively, interest.

Who has access to cash and credit?

It may be that the employee or owner doesn’t have the personal resources or credit to purchase a vehicle for business use, so the company must purchase it in order to carry out business functions. This is particularly common where owner-managers tend to leave cash behind to fund growth in their company rather than taking it all out personally, buying a car in the company can be a good use for that corporate cash build up.

Practicality of ownership

Many employees or owners wouldn’t otherwise own the type of vehicle that is required to carry out their employment duties, so it is more practical for the corporation to buy or lease the vehicle. This is particularly true in trades-based companies like construction, where the company requires the employee to take a van or truck full of tools and equipment to job sites.

Employee turnover

A similar concept applies for employee turnover where if the vehicle transports critical tools and equipment for the performance the employment duties, and an employee quits, the company will likely not want to incur downtime or costs in outfitting a new employee’s vehicle to do the job. In this scenario it better for the company to own or lease a vehicle.

Degree of business vs personal use

In situations where the vehicle is used almost exclusively for business purposes, such as with construction workers and realtors, we generally recommend that the corporation purchase or lease the vehicle. While there are still record keeping and reporting burdens, matching the degree of business use to the ownership makes sense. This analysis must also be performed on a case-by-case basis, however we generally (perhaps in some cases arbitrarily) advise that 90% business use is a safe threshold for this methodology. This generally results in the lowest tax bills also.

Length of ownership

Employees, owners, and corporations who like to turnover cars every 3-4 years should consider leasing for financial and non-financial reasons. Many leasing contracts include a maintenance component, and the short-term tax benefits of leasing are typically better than owning when you change vehicles every couple year.

Questions?

At Achen Henderson, we help entrepreneurs and business leaders build great companies. Do you have questions about how we can help you pay less tax in your corporation? Get in touch, today.

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