Can Car Loans be Shown in Income Tax in Canada?

The tax season is one of the least favorite times for business owners and working-class Canadians. After all, who likes incurring extra expenses?

The good news is that you can claim tax deductions on the loan payments interest rate if the vehicle is for business purposes to generate income. This can help lower what you owe the government. 

In this article, you’ll find out whether car loans can be shown in income tax in Canada.

Do Car Loans Reflect in Income Tax Canada?

Yes, car loans can reflect on income tax in Canada but only in specific cases. 

You can write off the cost of a depreciating business asset with Capital Cost Allowance (CCA). This applies to vehicles used for business purposes. 

Depending on your job, you may be able to deduct car expenses. Here are the qualified employees and their paperwork:

Employment Status	Requirements
Self-employed	Form T2125 State of Business/ Professional Activity Motor vehicle expense disclosure
Salary and commission-based employees	Form T777 Statement of Employment costs
Farming and Fishing Businesses	Form T2042

Cases When You Can Deduct Your Car as a Business Expense In Canada

The total interest on these car loans is deductible if the vehicles are for business purposes under CRA-approved allowable motor vehicle expenses.

The Canada Revenue Agency (CRA) made an allowance for the deduction of motor vehicle expenses provided they meet the following requirements:

• You work from a separate location other than your employer’s workplace location.
• Your employment contract must state that you are solely responsible for the motor expenses, not your employer.
• Your employer offers you a non-taxable allowance for motor vehicle expenses.
• Your employer filled and signed the Declaration of Conditions of Employment, known as form T2200. 

Type Vehicles You Can Claim on Tax Return 

You can claim tax deductibles on the interest charged on your car loan if you use it to earn employment income.

For income tax purposes, these types of vehicles are eligible for tax deductions:

• Motor vehicle
• Passenger vehicle
• Zero-emission vehicle
• Zero-emission passenger vehicle 

There is a limit on the amount of interest you can deduct if you use a passenger vehicle or a zero-emission passenger vehicle to earn employment income.

It will vary depending on the number of seats and the extent to which the van generates income for a business. 

Deductible Vehicle Expenses

The T2200, T2125, and T2942 forms clarify all the above conditions and ensure that your situation meets the terms under which you can deduct motor vehicle expenses. 

According to Statistics of Canada, the types of expenses you can claim on motor vehicle expenses (excluding CCA) in form T2042 include:

• License and registration fees
• Fuel and oil costs
• Insurance
• Interest on money borrowed to buy a motor vehicle
• Maintenance and repairs
• Leasing costs.

Steps on How to Write Off Car Loans in Income Tax

When leasing or buying a car, the tax deduction is directly related to its proportional use for its business to generate income.

Here are the steps on how to record motor vehicle expenses: 

1. Record the total kilometers you drive and the kilometers you go to earn business income to get the full benefit of your claim for each vehicle.
2. Document the odometer reading of each vehicle at the start and end of the fiscal period.
3. List the date, destination, purpose, and number of kilometers you drive for each trip.

If you change motor vehicles during the fiscal period, record the dates of the changes and the odometer readings when you buy, sell, or trade the cars. 

Note: You can deduct motor vehicle expenses only when they are reasonable, and you have receipts for the claim.

CRA’s Allowance for Mileage Expenses 

Although there is no limitation to the kilometers you can submit on your annual taxes, it must be reasonable, and you must provide receipts to support your claims. 

The CRA recommends that you record both kilometers accumulated for business and personal use and the odometer reading at the start and end of each fiscal year.

Conclusion

Some of your car expenses may be deducted from your taxable income if you use your car for work-related travel and incur allowable expenses.

You can deduct motor vehicle costs if you meet the criteria laid out in the T2200, T2125, and T2942 forms. These documents elaborate on the aforementioned conditions.

Note that if you use a passenger vehicle or a zero-emission passenger vehicle for work, you may only deduct a certain percentage of your interest payments.