Your car is a writeoff if you’re self employed

For this week’s Reality Cheque, we’re looking at the common misconceptions about automobile expenses.

If you use your car for your side gig or full-time business, and you aren’t writing it off, you’re leaving money on the table. But how do you actually write your car off for your business?

If you’re as clueless about writing off business expenses as David Rose is in Schitt’s Creek, you’re probably wondering where to start. As his father explained, “A writeoff is a business expense used to reduce your taxable income.” And, like Johnny Rose, we’ve got you. Well, us, and Jason Evans, an advice-only financial planner, who agreed to drive us through the ins and outs of writing off your car.

Why claim vehicle expenses?

If you’re earning income as a gig worker or an entrepreneur, you’ll have to pay taxes on that income. But there are ways to reduce how much you owe, and one of those ways is to deduct business-related expenses. If you use your personal vehicle to earn money in your business, you can claim a portion of your vehicle’s costs as a tax deduction to lower your income and tax owing.

“I didn’t claim my car for business purposes at first,” says Barry Choi, a freelance financial journalist who frequently drives to client meetings and news studios for live broadcasts. “Once I realized I could reduce my taxes owing, it was worth it.”

Expenses like registration fees, fuel costs (including electricity if you drive an EV), insurance, maintenance and repairs, and the lease payment, are all examples of expenses that you can partially deduct.

There are even some expenses for which you can deduct the full amount. For example, if you pay parking fees related to your business activities, then you can deduct all of those fees. If you have extra business insurance on your vehicle, you can deduct all of that insurance cost.

It’s not all a writeoff, though, thanks to mileage

Before you start mentally adding up the thousands of dollars per year you’re spending on your vehicle, keep in mind that you won’t be deducting 100% of those costs. For Canadians who use their personal vehicles to earn money, you’ll only be able to deduct a portion.

To determine how much to deduct, you’ll need to keep track of your mileage. You’ll record the kilometres you drive for personal use, and the kilometres you drive to earn income. “Use a logbook to begin tracking mileage,” says Evans. “A proper log should include the date, destination, purpose of the trip, and kilometres driven.” You should also track your total annual kilometres driven.

At the end of the year, whatever percentage of your driving you did for business is the percentage you can write off. (Yes, David, that is a writeoff.) For example, if you had $7,000 worth of vehicle expenses, and 50% of your vehicle’s mileage was used for running your business, then you can claim 50% of $7,000, or $3,500.

The CRA wants receipts

Keep in mind that you can only deduct reasonable expenses for which you have receipts. That means you’ll need to save your gas, maintenance and registration receipts, and download your insurance receipts from your insurer. Keep all of these receipts in a safe place for tax time, and snap quick photos for easy reference.

When it comes to keeping track of your mileage, you can use a physical logbook to record your business-related travel, or you can use an app like QuickBooks, MileIQ or DriversNote to track your trips using GPS automatically. Some of these apps charge annual fees, which you can also write off.

The most common vehicle deduction mistakes

If you’re using your vehicle for your business, deducting car-related expenses can reduce how much you owe at tax time. That said, there are mistakes Canadians commonly make when deducting vehicle expenses, some of which can trigger an audit by the CRA, which no one wants. Here’s what to avoid:

• Poor mileage documentation: When we say you need to document every trip, we mean every trip. The CRA doesn’t allow “reconstructed estimates,” you’ll need actual documented logs.
• Claiming personal trips as business trips: “You need to understand the rules for what is allowable business use and what is personal,” says Evans. Commuting to your office? No. Commuting from your office to a client’s office? Yes.
• Confusing repairs and improvements: You can deduct repairs and maintenance, like replacing brakes and changing the oil. Adding improvements like tinted windows or a new sound system falls into a different category. You can deduct those improvements, too, but over several years.
• Claiming 100% business use: Claiming that you use your personal vehicle is only for your business could trigger an audit by the CRA (in fact, the CRA often audits claims over 70%).

Yes, your car is a writeoff—just document, document, document

Claiming vehicle expenses isn’t complicated, but it does require some organization and planning throughout the year. Set yourself up for success by tracking your mileage starting on January 1, saving every receipt, and being honest about what's personal and what’s business use. A little consistency throughout the year can make a big difference in how much money you leave on the table at tax time.

“It can be a bit tedious, but it’s ultimately worth the tax savings,” says Choi.

Read more from this issue of The Get:

1. Costco super-fans share shopping tips for major savings  
2. Musician Isis Salam on turning creativity into long-term capital
3. Passive income jobs: Can you make money without a lot of effort?
4. Can I use a credit card to pay for college?