UPDATED JAN 20, 2022 • 8 MIN READ
In this article, we'll go through the rules surrounding how to deduct your business-related car expenses from your tax as a self-employed person in Canada, and describe how to calculate and keep track of tax-deductible mileage and other related car expenses.
If you're an employer wanting to know the rules for reimbursing your employees, or an employee looking for a how-to on mileage reimbursement, you can instead check out our respective guides for employees and employers. IYou must keep separate records for each activity if you are both self-employed and employed. If that's the case, we recommend reading both manuals.
As a self-employed business owner, you can deduct car expenses accrued while doing business. You can deduct all expenses associated with operating an automobile if you use it entirely for business. You can only deduct the expense of business travel if you use the car for both personal and business travel. Later, we'll talk about how you can keep track of that.
Before we dive into all the details, there are a couple of things you should be aware of:
For calculating your self-employed mileage deductions in Canada, the primary way to calculate your business-related car expenses for tax deduction purposes is known as the logbook method.
By keeping track of your mileage and total car expenses in a logbook, whether it's a paper book or an app, you can estimate your work-related car expense deductions. To work out the amount you can claim with this method, you must:
You will need to record your:
Motor vehicle expenses can only be deducted if they are reasonable and if you have receipts to back them up, according to the CRA. Deductible expenses include:
To give as accurate a result as possible, we recommend keeping “timely” records - in other words, records taken at (or as close as possible to) the time of the trip or expense. Weekly diaries, logs, trip sheets, account books, or similar records are generally considered “timely”. That way you also make sure that you do not forget to report any trips that you did in the past or report them inaccurately.
You must also be able to establish a percentage of business vs. personal use of your vehicle. This entails keeping a trip log and determining the percentage of time spent on business commutes.
In today's digital environment, you may save a lot of time and offer precise logs for all of your work-related journeys by using a mileage tracking app. Driversnote and other similar apps not only log your miles for you but also store and generate adequate records whenever you need them.
Knowing the portion of a car's business use will help you figure out how much you can claim for depreciation and other costs of operating that vehicle. Let's look at one quick example:
You've driven ten “personal” trips, each of which was 20 km. That totals 200 personal km (10*20 = 200).
You've also driven three work journeys totaling 200 business kilometers throughout the same time period.
Divide your business kilometers by the total number of kilometers driven to determine your business use. In our example, you've used your car for business 50% of the time (200/400 = 0.5).
Calculating your total deduction from there is simple: Multiply your expenses by the share of business kilometres. For example, if you had $500 of expenses, multiplying that by the share of business kilometres (0.5) means that your deductible business part of your car expenses is $250.
If you use the logbook or actual cost methods, there is no limit on how many kilometers you can deduct as long as you drive for business. However, there are a few additional items to consider, which we've put into a short list.
Business-related modes of transportation DO NOT include:
The CRA has different rules for what expenses you can deduct, depending on what kind of vehicle yours is defined at. There are four primary types of vehicle:
Try a digital logbook
That’s a great question! The CRA requires that you keep records for any deductions that you are claiming for six years from the date you submit your tax return. This is essentially to ensure that if they ask you to give evidence to back up your assertions, you will have everything ready and available.
That's it for our guide on the basics of deducting mileage for self-employed in Canada. We hope our guide has been useful :)
The Canada Revenue Agency (CRA) permits you to deduct mileage, or the number of kilometers you travel in your vehicle for business-related activities when you're self-employed or have self-employed income. You can only deduct mileage for driving associated with business purposes.
CCA (Capital Cost Allowance) is a cost-recovery method that allows you to recoup the cost of your vehicle. While you can't deduct the entire cost in one year, the CCA deduction allows you to recover a portion of it each year. This also takes into account your property's deteriorating worth over time.
This material has been prepared for general informational purposes only, and should not be taken as professional advice from Driversnote. You should consider seeking independent legal, taxation, or financial advice from a professional to check how this information relates to your own circumstances. Relevant laws also change from time to time.