How To Write Off Your Vehicle As A Business Expense
A common question that we gets asked is, “How to write off a car for business?”
For business owners, purchasing a new vehicle has some amazing benefits, including the ability to write off car expenses like gas, insurance, and maintenance.
However, vehicle expenses are the most commonly audited thing by the CRA. In this blog post we’ll discuss everything you need to know about buying a car, and how to document everything in case CRA comes knocking down the door.
Drive for Business Purpose
The key to successfully writing off vehicles lies in ensuring that your driving is related to business purposes.
Business-related driving includes meetings with clients, running errands, or going to the post office for business supplies are all business related tasks.
On the flip side, personal usage, such as going to the gym or grocery store, cannot be expensed.
Notably, driving to and from your office is considered personal usage, and you cannot write off those kilometers.
The reason being that because employees also incur the same cost, they also have to drive to and from work. For that reason, CRA does not allow that particular travel to be expensed
To maximize your tax benefits, it’s crucial to understand the different expenses associated with your vehicle. This includes the cost of buying the car or lease, as well as operating and maintenance costs such as gas, insurance, and repairs.
A QUICK MENTION: Expenses related to driving under the influence (DUI) or legal issues related to motor vehicle infractions, cannot be written off.
If You Operate A Sole Proprietorship
If you have a personal vehicle used for business purposes, all you have to do is simply buy that vehicle, and go through all the expenses incurred to keep your vehicle. At the end of the year, you would prorate your business usage of the vehicle and your personal usage.
If You Operate A Corporation
Buy Vehicle Under Corporation
So one, obviously, is the corporation can buy the vehicle. You would take a personal usage portion of it, which is your taxable benefit.
To calculate this taxable benefit, you would have to add up all your personal usage kilometers driven in the year with the use of the company car, and for 2023, That taxable income addition is going to be based on 33 cents times however many kilometers you drove for personal usage.
The second part on how the personal usage of the vehicle is going to be added to taxable income is through something called a standby charge. To calculate this is a bit complicated, so we’ll leave a link to CRA website to get the standby charge.
If you own the vehicle personally under your own name, but you still use it for business related traveling, you can pay yourself an allowance from the corporation for use of your vehicle. The allowance is based on the number of kilometers you drove for business purposes in the year.
For 2023, that’s 68 cents per kilometer on the first 5,000 kilometers, and then it’s 62 cents per kilometer on anything above 5,000 kilometers.
Important note, if you’re going to take an allowance from the company, you’re not allowed to be reimbursed for the gas, insurance, or any other expense at all. You’re just getting that flat rate.
Maximum Lease Rate
So for 2023, the maximum lease that you can do is $950 per month before sales tax.
Now, that doesn’t mean you can’t lease a car for more. You can, but your maximum amount of a tax write off is going to be capped at $950 per month.
So let’s say you leased a Range Rover for $1,500 a month. You can still get it, but the tax write off you’re going to get is going to be capped at $950/month.
Maximum Purchase Amount
If you choose to purchase a car outright, and then in this case, you get a maximum purchase price of $36,000 before sales tax.
Again, you can buy a vehicle for more, but the maximum you’re going to be able to write off is going to be capped at that amount.
You also have to realize when you purchase the car. You’re not able to write off the $36,000 right away in year one. You have to write it off over a set period of time per CRA’s rules on Capital Cost Allowance (CCA). The reason being is that since you bought the car in year one, it’s not really fair because you’re going to be using this car for a longer period of time.
If you are buying a work van or a work truck, and you are using it for more than 50 percent of the time, for business purposes, there’s actually no cap, so you can go above the $36,000 and you’ll get the full write off.
Tax Deductions For Electric Vehicles
Now this is a huge one. The government’s giving an incentive for people to get into EVs. So you get up to a maximum of $59,000 in a write off and you also get to claim the entire thing in year one. This could be potentially huge, so if you’re a business owner and you’re in the market for an EV sometime soon, now’s a great time to pull that trigger.
Vehicle expenses are an absolute CRA favorite. The reason being, people make mistakes or they don’t fully understand the rules. To be prepared, all you have to do is keep proper documentation. That means keeping all the receipts for all your expenses, e.g. gas, insurance, maintenance and repairs.
You don’t need to keep a paper copy. You can scan, PDF, take pictures, it doesn’t matter. Digital copies are totally fine.
Next is you need to know the total kilometers driven in the year. So, easy hack, take a picture of your odometer reading at the beginning of your fiscal year and an odometer picture at the ending of your fiscal year. So you’ll know exactly how much you drove in total for the entire year.
Next, you need to know how many kilometers you drove for business purposes.
So you’re gonna need the date, you’re gonna need the destination. You’re going to need the business purpose and you’re going to need to know the total kilometers driven from point A to point B and back.
That can seem very overwhelming, that’s a lot of work to track kilometers, but there’s such great apps out there now for receipt tracking, for tracking your miles, that this whole process, once you’ve got it all figured out, it’s very simple.
Trip Tracking Apps
Here are some Free apps to help track trips:
What Vehicle Expenses Are Tax Deductible?
- Fuel for business related travel
- Maintenance and repairs
- Depreciation based on capital cost allowance (CCA)
- Interest on car loan
- Parking fees and tolls
Expense Tracking App
To help keep you organize with all your motor vehicle expenses, we recommend Expensify.
You can simply take a picture of your receipt and they’ll store it for you, which comes in handy, in case CRA wants to see it.
Plus, you can connect to your accounting system, be it Xero or QuickBooks. That’ll help eliminate a few extra steps.
How To Write-Off 100% Of Motor Vehicle Expense, Legally.
One way to expense 100% of your motor vehicle expense, without causing major red flags with the CRA, is to have a separate second car. This could be a used car or a beater. You have this second car registered personally, and you have the nicer car registered in the business’ name.
If CRA questions you, you’ll have a valid reason. The more expensive car is used entirely for business purposes, and this beater, is my personal car.
Writing off a vehicle is a benefit that not many people have.
It’s crucial that you only can write off vehicle expenses that align with business purpose.
Remember to keep documentation because vehicle expenses are CRA’s favourite expense to write up.
Depending on your business structure, you’re able to apply certain taxable benefits and allowable deductions. Get in touch with an accountant to discuss how you can write off your vehicl
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