Demystifying Vehicle Expense Tax Deductions
Running a business involves a lot of expenses, and one of the most common ones is vehicle use. If you drive your car for business purposes, you may be eligible for a tax deduction. But how does this vehicle expense write-off work? Whether you're a sole proprietor or running a corporation, the rules are different, and it’s crucial to understand them to maximize your deductions while staying compliant with the Canada Revenue Agency (CRA).
This blog will demystify vehicle expense tax deductions, break down the rules for both sole proprietorships and corporations, and show you how to track your mileage efficiently.
I Drive My Car for Business – Is That a Write-Off?
Yes, if you use your personal vehicle for business purposes, a portion of your expenses could qualify as a tax deduction. However, this depends on how your business is structured (sole proprietor vs. corporation), and it's important to track your mileage and expenses accurately.
Personal Use vs. Business Use
You cannot claim vehicle expenses for personal trips (such as commuting from home to your office), but trips directly related to your business—like meeting clients or traveling to business-related errands—are fair game. However, the CRA has very clear guidelines on what qualifies as business use, and they will expect detailed records to back up your claims.
Vehicle Expense Write-Off: Sole Proprietor vs. Corporation
If you're wondering how the write-off works, it depends largely on whether you’re a sole proprietor or if you’re using your personal vehicle within a corporation. Each has its own rules and methods for calculating the deductible amount.
Sole Proprietor Vehicle Write-Offs
If you're a sole proprietor, you can only deduct the portion of your vehicle expenses that are directly related to earning business income. To calculate this, you’ll need to use the following formula:
(# of kilometers driven for business / total # of kilometers driven for the entire year) x total vehicle expenses
To break it down:
Business Kilometers: Track all the kilometers you drive for business purposes.
Total Kilometers: Keep a record of the total kilometers driven in the entire year.
Total Vehicle Expenses: This includes fuel, insurance, registration, maintenance, oil changes, and other vehicle-related costs. You must keep detailed receipts for all these expenses.
Pro Tip: Take a picture of your odometer on December 31 and January 1 every year. This will help you track your total kilometers accurately for your records.
Important: You’ll need to keep a mileage log, preferably using a tracking app like QuickBooks, MileIQ, or DriversNote, to make sure you have an accurate audit trail of your business-related travel.
Corporation Vehicle Write-Offs
When you’re using your personal vehicle in a corporation, the process is much simpler. Instead of calculating a percentage of vehicle expenses, you can invoice the corporation for kilometers driven.
All you need to do is keep a detailed mileage log that tracks:
The date of travel
The number of kilometers driven
The to/from addresses for each business trip
Once you've recorded this information, you can invoice the corporation using the CRA’s mileage rate. This rate changes annually, so be sure to look up the most current rates for the tax year you're filing.
Pro Tip: Unlike sole proprietors, you do not need to keep receipts for individual vehicle expenses like fuel, insurance, or maintenance. The mileage reimbursement covers all vehicle-related costs.
What Types of Vehicle Expenses Can Be Written Off?
If you're a sole proprietor, here are the common types of vehicle expenses you can deduct (proportional to business use):
Fuel
Insurance premiums
Registration and licensing
Maintenance and repairs (e.g., oil changes, tire rotations)
Leasing costs (if you lease your vehicle)
Depreciation (if you own the vehicle)
Corporations, on the other hand, do not need to track these specific expenses when using a personal vehicle for business—they simply use the CRA mileage rate for all business travel.
How to Calculate Your Vehicle Deduction
Let’s break down the calculation process, depending on how your business is structured.
Sole Proprietorship Calculation Example:
Suppose you drove 10,000 kilometers in total for the year, and 3,000 of those kilometers were for business purposes. You spent $5,000 on vehicle-related expenses, including fuel, insurance, and maintenance.
Using the formula:
3,000 km / 10,000 km = 30% business usage
30% × $5,000 = $1,500
In this case, you can claim $1,500 as the vehicle expense deduction on your tax return.
Corporation Reimbursement Example:
If you drove 3,000 kilometers for business in the year and the CRA’s car allowance rate is $0.65 per kilometer, the calculation would be: 3,000 × $0.65 = $1,950
In this case, you can invoice your corporation for $1,950 along with a detailed mileage log.
Common Misconception: Can I Write Off My Commute to Work?
One of the most common mistakes business owners make is thinking that they can write off their commute from home to their main place of work. Unfortunately, this is not allowed under CRA rules. According to the CRA, driving from your home to your primary place of work is considered a personal expense, not a business one.
Check out the CRA's guidelines on vehicle expenses for more information here.
However, trips between different work locations—such as from your office to a client’s office, or from your office to a post office — can be deducted. The only trips that remain non-deductible are the first and last ones (i.e. home to the main office and back home).
Tracking Business Mileage: The Easy Way
For both sole proprietors and corporate businesses, keeping a mileage log is essential. Luckily, there are plenty of apps out there that make this easier. Popular options include:
QuickBooks Online (my personal favorite!)
MileIQ
DriversNote
These apps track your trips, calculate business kilometers, and can help create a solid audit trail for CRA purposes. A reliable mileage tracker is invaluable, as audits do happen, and having detailed records can save you a lot of time and stress.
Ready to Maximize Your Tax Write-Offs?
Driving for business can add up to significant tax deductions, but only if you track everything properly. Whether you're a sole proprietor or running a corporation, understanding the rules is essential for making sure you don’t leave money on the table—or violate CRA rules.
Download my Tax Break Blueprint to learn more about maximizing your tax write-offs and saving big at tax time!
By staying organized and informed, you can ensure you get the most out of your vehicle expense deductions while keeping the CRA happy. And yes, you can stop at the Starbucks drive-thru on your way home.