Deducting Car and Vehicle Expenses: Part 1 - Employees
Employees, Sole-Proprietors and Corporations are eligible to deduct car expenses...
but the rules surrounding when and how much can get confusing.
If you're not a tax expert, have no fear; We've done our best to organize the information so that you can determine which situation applies to you and how best to optimize your tax deductions.
Over the next few blog posts we will cover car, motor vehicle and automobile expenses for Employees, Sole-Proprietors and Corporations. In this first post, we'll go over the rules for Employees.
Employees
One common misconception is that the Canada Revenue Agency (CRA) allows tax deductions for car expenses related to an individual's commute to and from their place of work. Unfortunately, this is incorrect. The usual drive to work is not deductible for tax. So, before you accept that job offer 100 kilometres (KM's) away, think twice!
But there is some good news: As an employee, you can deduct vehicle expenses if you meet certain criteria (note - you must meet all of the conditions to qualify):
- You were required to work away from your employer's place of business and you had to pay your own car expenses
- You did not receive a reimbursement or non-taxable allowance (if your allowance was taxable, then you still meet this criteria)*
- Your employer completes and signs a Form T2200, Declaration of Conditions of Employment**
* If you were required to work away from your employer's place of business, tallied the KM's you drove and then were reimbursed for those KM's based on CRA's reasonable per-kilometre rate, this amount is not taxable when you receive it. This would mean that you would not satisfy the second condition above, and as such, will not be allowed to deduct motor vehicle expenses on your tax return.
** A Form T2200 is a CRA form that an employer completes and gives to the employee in the event an employee's conditions of employment requires them to incur expenses on behalf of their job (i.e. car expenses, cell-phone expenses, home office expenses, etc.).
If an individual satisfies all of the conditions above, they would be allowed to deduct certain expenses on their personal tax return (a percentage based on the number of KM's driven for work versus the KM's driven for personal reasons). For example, if you drove 2,000 KM's for work-related purposes and drove 10,000 KM's total in a certain year, you would be entitled to deduct 20% of all your car expenses.
On your personal tax return, you'll populate all of the car expenses and related KM's on Schedule T777 - Statement of Employment Expenses.
Deductible Expenses for Write-Off
Generally, any mandatory car expense that you incur enabling your vehicle to be on the road, is usually deductible.
For example, you'll need fuel to drive, an oil change to keep the car going and new windshield wipers to see through the rain. But you don't need tinted windows or brand new expensive rims on your tires to get from point A to point B (unless you can justify it).
The most common car expenses you can deduct are:
- Gas
- Insurance and licensing fees
- Repairs and maintenance
- Leasing costs
- Depreciation
- Interest paid on money borrowed to buy the vehicle
Final Thoughts
The rules for employees are pretty clear-cut. Before agreeing to an employment contract, ensure to discuss your duties and responsibilities in relation to travelling outside your place of work with your employer. Determine whether you will be reimbursed for KM's driven or whether the employer will complete and sign a Form T2200.
Disclaimer: This blog post is for informational purposes only and should not be solely relied on to make tax decisions. Readers are urged to seek professional advice before using this or similar information to make tax decisions.
