If you’re interested in writing off your car expenses as an employer or business owner in Canada, it’s important to note that the rules have been adjusted for 2022.
Fortunately, this is mostly good news, as the limits for deductions are higher to compensate for inflation in the consumer price index.
Ready to find out what’s changed and how to take advantage of these tax incentives in your business? Read on!
Understanding Motor Vehicle Expenses and Deductions
There are many categories of motor vehicle expenses that you can deduct, all of which are subject to limits.
We’ll get into the specifics in a little bit, but first, you should understand capital cost allowance.
Capital Cost Allowance (CCA)
Capital cost allowance (or CCA) is the amount of money you’re allowed to deduct from your taxes to account for depreciation of property. With a vehicle, the property will wear out and lose its value over time, so the government allows you to deduct this cost over several years.
CCA is going to be the biggest vehicle expense category for deductions in most cases, with a limit of up to $59,000 before tax for zero-emission passenger vehicles and $34,000 for non-zero emission passenger vehicles (before tax).
Note that you’re NOT allowed to deduct the full cost of depreciable property in the same year in which you acquired it.
We can’t fully cover CCA without touching on joint ownership, because this can dramatically change how much you’re allowed to deduct.
If you share the ownership or lease of any passenger vehicles or zero-emission passenger vehicles with another person, then you essentially share the limits on CCA, interest, and leasing costs.
Updates on Vehicle Tax Deductions Limits and Expense Benefits
Now that you have a little context on the big picture for motor vehicle deductions, let’s take a look at what’s new for 2022. As reported by the Department of Finance Canada, here are the updates on tax deduction limits:
- The ceiling for capital cost allowances (CCA) for zero-emission passenger vehicles is increased from $55,000 to $59,000 before tax.
- The ceiling for CCA for non-zero emission passenger vehicles is increased from $30,000 to $34,000 before tax.
- Deductible leasing costs are increased from $800 to $900 per month before tax
- Tax-exempt allowances paid to employees using their personal vehicle for business purposes in the provinces are increased by two cents to 61 cents per kilometre for the first 5,000 kilometres and 55 cents for each additional kilometre – and in the territories, an increase of two cents to 65 cents per kilometre for the first 5,000 kilometres and 59 cents for each additional kilometre.
The purpose of these changes is in response to increases in the consumer price index (CPI).
However, note that these updates refer to used or new vehicle purchases or leases entered into after January 1, 2022 – this means if you already had a vehicle or lease prior to the start of 2022, these changes likely won’t apply to you.
Types of Vehicles Expenses a Business Can Deduct
CCA is typically the biggest one, but there are several other categories of motor vehicle expenses that you’re allowed to deduct:
- License and registration fees
- Fuel and oil costs
- Interest on money borrowed to buy a motor vehicle
- Maintenance and repairs
- Leasing costs
Not all of these will apply in every case, but it’s important to keep accurate records to support any vehicle expense deductions you claim.
When it comes to tax time, these vehicle expenses will be claimed on Line 9281 – Motor vehicle expenses (not including CCA) of Form T2125 or Form T2121, or line 9819 of Form T2042.
Official Vehicle Definitions
Aside from the types of expenses, another key factor is the type of vehicle. The vehicle definition – either a passenger or motor vehicle – will affect how you record and deduct your vehicle expenses.
Technically, a motor vehicle is intended for transporting goods or equipment, while a passenger vehicle is intended to move people. In terms of category, motor vehicles tend to be pick-up trucks, sport utility vehicles, and vans or minivans, while passenger vehicles tend to be coupes, sedans, station wagons, and luxury cars – but it ultimately depends on what you use the vehicle for.
We should also point out that there’s an additional category for zero-emission vehicles, which can apply to both motor vehicles and passenger vehicles. The term “zero-emission” refers to plug-in hybrid cars with a minimum battery capacity of 7kWh, as well as fully electric vehicles or vehicles fully powered by hydrogen.
How to Record Motor Vehicle Expenses
- Keep all receipts from vehicle-related purchases, including gas, maintenance, insurance, and so on.
- Track the number of kilometres you drive (ideally updated after each trip), and note the ones driven specifically for earning business income. The Department of Finance Canada recommends that you maintain a full logbook to document mileage.
- Record the vehicle’s odometer reading at the start and end of every fiscal period.
Buying and Leasing Cars for Tax Deductions
Here’s another key question: Is it worth it to buy or lease cars to adjust your total tax liability?
While we recommend you actually talk to an accounting professional for personalized tax advice, our general rule is to do what makes sense for your business needs first, and then consider the timing based on your projected tax liability.
For example, if you’ve been thinking you need a more reliable vehicle for hauling goods to and from your warehouse, and you have a sizable tax bill coming, it may make sense to make the purchase so you can deduct some of those expenses in a high-income fiscal period.
But you should also keep in mind that limits on things like CCA and interest tend to increase as well. Whether a purchase or lease is right for you depends on a number of factors, so it’s worth looking at the situation carefully and talking with a professional before you make a decision.
Conclusion: How to Write Off Your Car for Business in Canada
Remember that you have a number of different business use expenses you’re allowed to deduct for vehicles in Canada, including the CCA, mileage, insurance, loans, and leasing.
You can dramatically reduce your tax bill by strategically and deliberately managing your vehicle expenses and deductions for the year.
Ultimately, we hope this article has given you some useful guidance on vehicle expense deductions in Canada for 2022. Considering the fact that vehicles are one of the biggest expenses for most businesses, it’s well worth getting this right!
Last but not least…
If you have any questions on vehicle expenses or how to write off a car, contact us at Envolta to get started!