Drive and Save: Can You Claim a Car Lease as a Business Expense?
In this guide, you'll learn about:
- The foundational principles of “business purposes” for leased vehicles
- The Canada Revenue Agency (CRA)'s perspective on leased cars
- The potential to claim expenses like mileage, gas, repairs, and maintenance
Last Updated November 10, 2023
12 min read
With the rise of flexible car solutions, car subscriptions have taken the Canadian market by storm. At Roam, we understand that this shift from traditional ownership to subscriptions, which offer the luxury of extended rentals, has left many individuals with burning questions. Among them, “Can I claim a car lease as a business expense?” remains prevalent. While the simple answer is yes, the finer details are a tad more intricate. For all the curious minds looking to navigate the Canadian tax landscape with their car lease, this post aims to be your compass.
Decoding “Business Purposes” for Leased Vehicles
At the crux of car expenses lies the term “business purposes.” Understanding this concept is pivotal in determining the extent to which you can claim a car lease on your tax return. If you're utilizing your car for business, many of the related expenses can be tax deductible.
For example, if you're a sales representative driving across the province to meet clients, your car is an essential tool for your trade. Therefore, the associated expenses, such as lease payments, directly translate to business expenses. However, should the vehicle be used sporadically for work errands amidst dominant personal use, only a fraction of the monthly lease payment attributed to work may be deductible.
The CRA's Lens on Leased Vehicles
The Canada Revenue Agency (CRA) sets the gold standard for what can and cannot be deducted. Their guidelines are essential in clarifying the foggy areas of car expenses, especially for leased vehicles.
For starters, vehicles are broadly classified by the CRA into passenger vehicles and other motor vehicles. While both categories have their nuances, passenger vehicles have tighter restrictions when it comes to deductions. A significant point of note is the $300 per month of interest charges cap the CRA has established for passenger vehicles. This essentially implies that if your monthly lease payment's interest exceeds this bracket, the full interest amount isn't eligible for deduction.
Another critical aspect under the CRA's purview is the capital cost allowance (CCA). Although this typically revolves around purchased vehicles, it's worth understanding its relevance when contrasting the decision to buy or lease a car.
Expenses Beyond Lease Payments: Mileage, Gas, Repairs, and More
The leased car's realm doesn't solely revolve around lease payments. There's a spectrum of associated costs, and understanding which ones can be claimed is crucial for maximizing deductions.
- Mileage for Business Trips: One of the most straightforward deductions is mileage accrued from business-related travels. This doesn't include the daily commute to your workplace but emphasizes additional business trips, like client meetings or supply runs. The CRA designates a specific rate per kilometre, adjusted periodically, that you can claim. Maintaining a detailed log is vital for this – capturing dates, purpose, distance, and destinations for each trip.
- Fuel Costs: Gas, an inevitable expense for car users, can also be deducted when used for business purposes. If you've travelled 500 kilometres for business in a month and it consumed $100 of gas, this amount can be included in your motor vehicle expenses.
- Repairs and Maintenance: Keeping your car in optimal condition is essential, especially if it's a linchpin in your business operations. Hence, costs incurred for repairs and regular maintenance are also considered deductible. However, it's imperative these repairs are not upgrades or enhancements, but necessities to keep the vehicle running efficiently.
- Service Fees and Other Charges: Over the course of a lease, you may encounter service fees, especially when securing the lease or during specific check-ins mandated by the leasing company. When these service fees are directly tied to a car for business use, they too become a potential area for deductions.
Registration Fees and their Deductibility
As you navigate the intricacies of car expenses, another crucial area that warrants attention is registration fees. Whenever you lease a car, there's often an upfront cost to register the vehicle under your name or your business. In Canada, these registration fees can also be considered motor vehicle expenses, allowing you to include them in your annual deductions. It's a relief to many to know that the administrative aspects of their leased vehicles can also offer tax advantages.
Striking the Balance: Personal vs. Business Use
A fundamental principle to grasp when considering car expenses is the proportion of personal use versus business use. If, for instance, you've leased the car primarily for personal endeavors but occasionally use it for business errands, the CRA expects you to prorate the expenses. This means if 30% of the car's use is for business purposes, then only 30% of the car's expenses, including the lease payments, can be claimed as tax deductions.
It's also worth noting that in cases where the leased vehicle is used equally for personal and business purposes, say 50/50, then deductions need to be split accordingly. Detailed logs and records can prove invaluable in such scenarios to justify the deductions during income tax filing.
The End-of-Year Significance: December 31
Why does December 31 hold such importance when discussing leased vehicles? As the end of the tax year approaches, it's vital to evaluate the total of all your lease payments made within that year. The CRA often assesses if this cumulative amount surpasses the set limit for the deduction of passenger vehicles. If it does, there might be implications the following year, where a portion of the lease payments may need to be included as income. This mechanism is in place to adjust for any over-deductions made in the previous year.
Guidance for Business Owners
For business owners pondering whether to buy or lease a car, the decision hinges on a myriad of factors. Lease agreements offer flexibility, especially for those who prefer updated models without the commitment of ownership. On the flip side, purchasing might resonate with those looking at long-term economic benefits, especially when factoring in the Capital Cost Allowance (CCA).
One consistent advice across the board is the importance of meticulous record-keeping. Business owners should ensure they maintain an exhaustive log of all drives made for business purposes, encompassing the date, purpose, distance, and destination. These records are not only vital for determining the percentage of business use but also serve as substantial evidence should the CRA ever have inquiries.
Lastly, the complex world of taxes and vehicle expenses often necessitates expert insight. Consulting a tax professional or an accountant who's well-versed with Canadian tax laws can be a game-changer. Their guidance can ensure that whether you're an individual or a business owner, you optimize the benefits of your leased vehicles from a tax perspective.
Leasing a car, especially through flexible subscription models like what Roam offers, is more than just about driving; it's about maximizing the benefits that come with it. From understanding how the Canada Revenue Agency views your vehicle to ensuring every dollar spent is accounted for, knowledge is paramount. Whether you're a solo entrepreneur, a business magnate, or someone using a leased car for occasional business errands, being informed is your ace. Navigate the roads of tax deductions with confidence, and remember, the journey is as significant as the destination. Safe and informed driving to all!