Avoiding the Auto Expense Audit

Geoff Currier & Evelyn Jacks

There are nearly 1.2 small businesses in Canada along with many more individuals who are in the GIG economy, or earning income through contract or freelance work. It’s critical for these clients to report all income and to accurately report any legitimate deductions and expenses – including those related to mixed-use business-use vehicles.  Those expenses are always audit-prone.  Here are some tips to discuss with clients to make sure those auto log details are up-to-date and to prepare them for potential decisions before the year end:  should I buy or lease a new car?

Deductions.  When it comes to assessing the deductible expenses on a T2 return or a T2125 Statement of Business or Professional Activities form, CRA will look closely at expense deductions such as capital cost allowance, home office expenses and especially, vehicle expenses.

The Dual Use Vehicle: For the self-employed small business owner, it is possible that a vehicle may be for both business and personal use. This is certainly true for those in the ride sharing business. If this applies to your clients, it is important that the proprietor keeps an accurate log of the business use vs total use in the year – that’s what’s deductible.

Calculating Deductions: The owner must track the kilometres driven in a year as well as the kilometres driven for business purposes. Based on those figures, a percentage of the vehicle costs are considered deductible. Parking fees incurred for business are 100% deductible, but most others are based on the percentage of vehicle use for business purposes.

These include fuel and oil, (electricity if the vehicle is ZEV) maintenance and repairs. insurance, licence and registration, interest payments if your client has financed the vehicle, leasing costs if the vehicle has been leased and capital cost allowance (CCA), the tax depreciation on the vehicle’s purchase. 

The vehicle’s total cost, including taxes and registration and delivery fees should be determined. The client must note the capital cost limits for passenger vehicles if the purchase price exceeds CRA limits. This can range from $34,000 to $39,000, depending on the tax year.  Here’s the exact info for the 2026 tax filing year:

Maximum Auto Expense Deduction Limits:

            Non-zero emission vehicles:      $39,000 plus taxes

            Zero-emission vehicles:             $61,000 plus taxes

            Deductible leasing costs:           $1,100 a month plus taxes (new leases after Jan. 1, 2026)

            Interest on vehicle loans:           $350 a month (new loans after Jan. 1, 2026)

            Deduction for tax exempt allowance paid to employees who use their cars at work:

            73 cents for the first 5,000km; 67 cents thereafter

            In the Territories                       77 cents for the first 5,000km; 71 cents thereafter

            Taxable Benefits: Personal portion of auto expenss paid by employer:  34 cents/km

            Taxable Benefits: Personal portion of auto expenses – auto salespeople: 31 cents/km    

The Auto Log:  Your clients will need one to justify their claims above.  Good news, as long as you keep a full detailed log for one year, you may qualify for a simplified documentation process: it’s possible use a three-month sample logbook and  as long as the usage is within the same range (within 10%) of the results of the base year providing it’s still representative of normal use. Over that range, the client will need to keep records for the other 9 months of the year.

Remember, for each business-related trip, record the destination, the reason for the trip and the distance covere,.along with the date.  Be sure to jot down the odometer reading  the start and end of the fiscal period – for most people that’s January 1 and December 31.  Note, according to the CRA if the client changes motor vehicles during the fiscal period, it’s important to record the date of the change, the value of the vehicle plus taxes and the odometer reading when there is a buy, sell, or trade transaction.

CA Rates.   Next up, determine the class of vehicle and the allowable CCA.

• Class 10 (30% rate): For standard motor vehicles and passenger vehicles under the cost the maximum capital cost limit.
• Class 10.1 (30% rate): For higher-cost passenger vehicles exceeding the capital cost limit.
• Classes 54 & 55: For eligible zero-emission vehicles (ZEVs), the rate is usually 30% and Class 54 is used.  Other zero-emission vehicles could include:

• Class 55 (40% rate): Used if the zero-emission vehicle is a taxicab or a motor vehicle used strictly for short-term leasing or renting.
• Class 56 (30% rate): Used for zero-emission automotive equipment not designed for highways, such as watercraft or aircraft.

New Tax Incentives:  Check out the recent accelerated CCA rates for vehicle acquired before 2034 at the CE Summit on September 23. This could be as much as 100% as shown below (however, beware of potential recapture on a future sale). 

•  100% on or after January 1, 2025, and before 2030
• 75% after 2029 and before 2032
• 55% after 2031 and before 2034

The Bottom Line: Your clients need to understand that CRA will take a close look at vehicle expenses so it cannot be over emphasized just how important proper record keeping is.  Your clients can find calculation charts and forms can be found online through the Canada Revenue Agency Motor Vehicle Expenses Guide. But for most people this is far too complex to comprehend, especially if they are wanting to make decisions about whether to buy or lease a car this year. But .

That’s why they need your expert advice and validation.  . Making sure that all the information provided to CRA is correct will help your clients avoid an audit.  It’s a very valuable service you can provide.

Knowledge Bureau’s Sept. 23rd CE Summit: Audit Defence Management is a full day of advanced professional development aimed at protecting your clients. You can still register online, and check out the detailed agenda!

ADDITIONAL EDUCATIONAL RESOURCE:

Finally, invite your clients to listen to Real Tax News with Evelyn Jacks and Friends to understand their tax system better.