Vehicle Expenses for Sole Proprietors in Canada
You may know that you can claim your transportation costs as they are incurred by your business, but here is some more detail on what can be claimed and how.
You can claim (and indeed the form in the tax return references) fuel, repairs and maintenance, insurance, license and registration, and parking. Keep receipts for these and if you have two vehicles make sure to write the corresponding vehicle on each receipt as there will need to be a separate form for each vehicle. If you have an electric vehicle you can claim electricity costs. Some other common expenses that are not explicitly listed are tolls (for business trips) and auto club expenses, such as CAA. There are also expenses incurred for owning or leasing a vehicle such as interest or leasing costs and capital cost allowance but the calculation there is more complicated than the ratio you will use to calculate your basic expenses.
Parking is not included in the main table for motor vehicle expenses where the ratio is applied because it is assumed that you will only keep receipts for your business parking, and thus it is claimable at 100%.
But how, you may be asking, is the ratio calculated that allows you to claim only the business portion of your expenses? This is determined by dividing your business mileage by the total mileage travelled.
You will need to record your odometer at the beginning and end of your fiscal period (generally January to December for sole proprietors), as well as each business trip: with the date travelled, where it was to and from, the purpose, and the number of kilometres travelled.
Then this ratio is applied to the expense. So if you had $100 in electricity costs for your vehicle and 90 km out of 100 km total driven for business, you could claim $90 in electricity costs.
What qualifies as a business trip? If your home is your principal place of business, you’re in luck: you can claim any driving to a business destination (such as to pick up supplies or meet a client) from your home. If you drive to your principal place of business from your home, however, this trip is not considered a business trip and cannot be included in your total business mileage.
You may have heard of people claiming mileage: generally claiming motor vehicle expenses this way is only available to employees and shareholders of a corporation. However, if you only occasionally use your motor vehicle for business you can claim per-trip expenses such as fuel or parking on an ad hoc basis.
An interesting question that I haven’t gotten resolved yet is how to treat bicycles and electric bicycles for the sole proprietor. With motor vehicles you limit the capital cost allowance (or part of the asset that you are expensing each year) by percent-of-business-kilometres annually under class 10 or class 10.1. However to be class 10 or class 10.1 I believe the vehicle has to be self-propelled, which a bike is not. I think a bicycle or e-bike would fall under class 8 (where all the assets go that don’t fall under another class), but I’m not sure and there’s not any information online that I can find to this effect.
And then would expenses similarly be limited by kilometres? I would say yes, this seems reasonable, but again I haven’t found anything confirming this from Canada Revenue Agency.
Personally I will claim my e-bike as class 8 and the expenses on the motor vehicle schedule, but this hasn’t been tested by audit. If anyone knows anyone who’s been audited on their bicycle expenses, I’d be interested in hearing what happened, because there seems to be very little information on this subject available.
Anyway, this is a basic primer on vehicle expenses for the sole proprietor. If you have questions, please ask.
References
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4002/t4002-5.html#tocch3
https://www.canada.ca/en/revenue-agency/services/tax/businesses/small-businesses-self-employed-income/business-income-tax-reporting/business-expenses/motor-vehicle-expenses.html
