DEDUCTING CAR EXPENSES: PART 2 - SELF-EMPLOYED
In our first blog post, we discussed the rules behind car expenses for employees.
You can find that post here.
This time around, we'll explain the rules behind deducting car and vehicle expenses for self-employed individuals.
Are You Self-Employed?
If you are deriving income (or trying to) for yourself as a freelancer or owner of a business, rather than for an employer, you are self-employed. This means that your income and expenses are recorded on a specific schedule on your annual T1 Personal Income Tax Return. As a self-employed individual, you are not incorporated, but rather designated as a sole proprietor.
Expenses incurred in the process of generating income for your business (or businesses) are deductible, so long as they are reasonable. In this blog post, we review many of the common expenses that sole proprietors use as write-offs on their tax returns.
In many cases, one of the largest expenses incurred by a sole-proprietor is his/her vehicle expenses. A car is used to travel to clients' place of business, to meet vendors/suppliers, for research and for a variety of other reasons.
The Canada Revenue Agency (CRA) allows for the deduction of these car expenses so long as they are in proportion to the self-employed individual's business use.
How It Works
Vehicle expenses are recorded on Schedule T2125 - Statement of Business Activities on the T1 Personal Income Tax Return. Allowable car expenses are limited to the business use portion of the self-employed's activities. It is for this reason that sole-proprietors need to keep track of the Kilometres (KM's) they drive for business reasons as opposed to personal reasons.
Your car expenses are entered on the schedule in full and so are the total KM's driven in the year. You must also enter the KM's driven for business reasons. Your vehicle expenses are then pro-rated by the same ratio as your business KM's and total KM's.
Here's an example:
If you incurred $1,000 total in fuel for the year, drove 8,000 KM's during the year, of which 4,000 KM's were for business, your expense deduction for fuel would be $500.
Here's the math:
1) 4,000 KM's out of 8,0000 KM's is 50% (driven for business use)
2) 50% x $1,000 of fuel = $500
The same goes for all other expenses: Repairs, Maintenance (oil changes for example), Tolls, Licensing/registration fees and Insurance to name a few.
Be sure to keep all of your receipts and bills relating to your vehicle expenses, including a log of your business and personal travels. These will be the first things the CRA will ask for if you're ever chosen for an audit.
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.