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Last updated: Oct. 10, 2023
For self-employed individuals, claiming tax deductions correctly can be a time-consuming, frustrating, and complex process, especially when it comes to tracking vehicle expenses.
Using your personal vehicle for business purposes or to earn business income allows you to deduct a certain percentage of related expenses, such as fuel and maintenance costs based on the mileage driven. However, the tax laws are very specific about which expenses are eligible for deduction and which are not.
Let’s take a closer look at some tax preparation tips when it comes to business-related driving.
Motor vehicle expenses can be deducted only when they’re considered reasonable and are accompanied by the required receipts. Vehicle expenses for self-employed individuals can be claimed using Canada Revenue Agency (CRA) form T2125 (self-employed business or professional), form T2121 (fishing activities), or form T2042 (farming activities).
Deductible expenses include:
- The cost of fuel and oil
- Insurance payments
- Leasing fees
- Interest paid on money borrowed to purchase a vehicle
- Regular maintenance and repairs
- Licence and registration fees
- Electricity for zero-emission vehicles
To receive the full benefit of your claim for each vehicle, make sure you include the reason for use. A few examples of business-related driving purposes may include:
- Driving to meet with clients and attend trade shows
- Driving to purchase necessary business supplies
- Using your vehicle to run business-related errands
- Driving to visit customers
Understand what kind of commute qualifies for deduction.
Commuting from your home to your workplace is considered personal travel and doesn’t qualify as business use of your personal vehicle, with only a few exceptions:
- Travelling from your home to a client’s place of business (or other location to attend a business meeting) and travelling directly home
- Driving from your home to a client’s place of business (or other location to attend a business meeting) and back to your office or workplace
- Travelling from a client’s place of business (or other location to attend a business meeting) and back home
When it comes to tracking your mileage for tax preparation purposes, you must keep a detailed record of the total kilometres driven annually along with the kilometres driven to earn business income. The CRA won’t accept your business-related vehicle expenses as a tax deduction if you can’t provide this detailed record, which will ultimately lead to you paying more taxes and keeping less money in your pocket.
It’s important to keep a detailed logbook that can be updated regularly. Your logbook should contain the following information for every business-related trip taken:
- Date
- Purpose of the trip
- Destination
- Total kilometres travelled
There are also apps out there which can simplify this process! Any questions? Reach out to your FBC team member!
When it comes to tracking your business-related receipts, use the following strategies.
1. Stay consistent.
To simplify the annual process of tax preparation, don’t toss your vehicle-related receipts into a pile and plan to deal with them later. Receipts can pile up quickly, and you may forget what each expense was for.
Write down your work-related expenses and maintain your books each day or on a regular basis, such as once a week. (It could be a Sunday afternoon tradition.) Once they’ve been recorded, store them in a folder or labelled box. Remember to save every receipt, no matter how small the charge. The CRA will not accept banking or credit card statements to justify eligible work-related expenses.
2. Label and track each receipt.
If you’ve made a business-related purchase for your vehicle, categorize it correctly as soon as possible. Doing so makes it easier to file your taxes during tax season. It can also be helpful to write notes on the back of each receipt, including the purpose of the purchase and the category it belongs to.
If you prefer to store your receipts digitally, free software programs and apps such as Evernote allow you to scan any receipt using your phone’s camera and file it electronically. If you choose this method, however, be sure to also keep the physical receipt.
3. Perform regular receipt checks.
Conduct a weekly or monthly check to make sure documents are filed into their appropriate categories, such as fuel costs, tolls, parking fees, maintenance-related bills, or miscellaneous purchases. At the end of each month, identify what you spent per category by totalling up your receipts. Avoid throwing any receipts away unless they’re more than eight years old in case the CRA wants to see them.
4. Work with a bookkeeper.
A bookkeeper will manage your expenses and keep track of your receipts for tax purposes. A bookkeeper will also give you an in-depth report of your daily, weekly, and monthly expenses. Hiring a bookkeeper means that you won’t have to spend valuable time tracking expenses, freeing up more time for you to run your business.
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For Canadian farmers, contractors, and small business owners, tax planning and tax preparation aren’t once-a-year events. They require an ongoing strategy focused on meeting today’s goals and building wealth for the future.
To help you get started, we created the Ultimate Guide to Tax Planning and Preparation for the Canadian Farmer, Contractor, and Small Business Owner, a comprehensive resource that provides deeper insight into tax planning and preparation.
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