Ronika Khanna, a CPA and CFA, walks through how sole proprietors deduct car expenses on Canadian taxes using form T2125. You need a mileage log with odometer readings and trip details, keep receipts for fuel and repairs, and know that commuting home to an office doesn't count. Lease payments and depreciation are deductible, but the CRA audits this closely.
Hello everyone. In today's tutorial we are going to be talking about how to deduct car expenses and five things that every sole proprietor that is unincorporated business should know about. Deducting car expenses. This is a very popular topic. Business owners are interested in knowing how and under what circumstances they are they can deduct car expenses. And hopefully I'll be able to shed some light on this topic. My name is Ronica Canna. I am a cpa, a CFA and the founder of Montreal Financial, where you can find lots of resources for small businesses and self employed people. And you can sign up for my newsletter to improve your financial skills and your financial literacy. Okay, so a sole proprietorship is a bit different from a corporation or employees of corporation in the way that they can deduct car expenses. That is, there is only one way. And they are required to base your car expense deduction on the actual expenses they incur. This means that those expenses have to be tracked. This also means that in addition to tracking your car expenses, you also have to track the percentage of kilometers that you travel for business purposes. Once you determine this percentage, you essentially apply the percentage to the actual car expenses incurred to to arrive at the deduction that you are able to claim. And this is all entered onto a form called the T2125, which is part of your personal tax return. So either you can do this or your accountant will take care of it. And keep in mind that accounting software actually makes this quite easy. So you would enter your expenses, you would enter the percentage percentage that you drive for business purposes. And in most cases the accounting software will calculate it automatically for you.
So in terms of the types of deductible car expenses, there are fuel, gas, oil, insurance premiums that you pay for your car repairs and maintenance, which in some cases can really add up. Lease payments. Either you lease your car or you own your car. If you lease your car, you are able to deduct the lease payments up to a certain maximum. And this generally changes from year to year. If you purchase your car, you are allowed to deduct the interest on your car loans and you are also allowed to deduct depreciation at a specific rate that is designated by Revenue Canada. It is referred to as a capital cost allowance or the CCA rate. And the CCA rate is determined based on the cost of your car. So it either goes into Class 10 or Class 10.1. Then you have registration and license fees, things like tires, and anything else that relates to the upkeep of your car. In terms of parking, this is more of a binary expense in that if your parking costs relate to a business purpose, you may be visiting a client or perhaps you're visiting your accountant, then you can claim it. Other types of parking are not claimable, so it means that for parking costs you are not actually applying a percentage to your total parking, rather you are simply claiming business related parking. So it is essential to keep a mileage log where you reflect your business related travel. Your starting point for mileage log is to take an odometer reading at January 1st and take another odometer reading at December 31st so you can determine what your total mileage was during the year. If you start using your car midway, then you would take it from that date. And once you do that, then you have to maintain what is referred to as a log. And the log contains certain information which is the date of your trip, the total distance that you drive, the purpose of the trip, and each trip should be reflected individually. So what is the business purpose of the trip? And ideally you would put the name of the client or the name of the supplier, or your bank manager, accountant, etc. Whoever that is. And it's important to note that Revenue Canada tends to audit car expenses more often than other expenses because there is more room for manipulation. It's a soft expense, so you have to really be prepared to defend your claim. And to do this it's not that difficult. But you have to be on top of your record keeping. In terms of getting a mileage log, you could simply go to the Internet and find download an Excel or Google Sheets tab template and use that. There are various apps that you can use on your phone that will actually track your mileage or you can get a physical hard copy book. Lots of these are available on Amazon or wherever you like to buy your office supplies. So it's really essential and I cannot stress this enough to have good record keeping. In addition to your mileage log, you also want to make sure that you maintain all of your receipts for your fuel, your repairs, your insurance and license registration, all of your car expenses. You can either keep hard copies of these receipts in a file folder or you can scan them and save them in an accounting folder on your computer. Ideally, you organize the receipts so they're easy to find in the event of an audit. And again, it's really important to have these in case of audit and also for your own purposes so you can see what your car expenses were during a year and compare them to previous years. History can be really valuable.
You should also know the difference between travel for business purposes versus travel for personal purposes. And this is somewhat obvious, right? So if you are traveling to go see a client, for example, or you are doing a delivery, you're traveling to a business location, you're meeting with a supplier, you're meeting with a bank, bank manager, or your accountant, those are all business related trips. One thing to keep in mind is that if you have an office that is not a home office. So for example, if you rent an office somewhere else, the travel between your home and your office is not considered deductible for business purposes. So you would want to exclude this from your mileage log. And again, just to emphasize, make sure you keep records of.
The purpose of your business related trips because this will inform whether they are deductible and it'll make clear to CRA if they are reviewing your record. So the key takeaways are that if you are a sole proprietorship or an unincorporated business, you have to reflect your actual expenses and you can't take for example, a per km rate as you can if you are an employee of a corporation. Secondly, make sure that you separate business versus personal mileage. Third, it's really important to track your deductible expenses. You should have a system. You can use accounting software or you can use a spreadsheet to do this. Fourth, keep a detailed mileage log. And finally, make sure you organize and retain all of your receipts and records. So I hope this was helpful. If you have any questions, don't hesitate to leave a comment and please like and subscribe. Have a great day.
