Car Insurance Tax Deduction

Can I use my car insurance for a tax deduction?

Are you wondering if you can save some money on your taxes by using your car insurance costs? If you’re in Canada, you’ve come to the right place. While the Canada Revenue Agency (CRA)’s website has all the details about car expenses, we know that finding what you need can be challenging.

This blog is here to answer the question, “Is my car insurance tax deductible?” among others, so that it’s one less thing you have to worry about this tax season.

What qualifies as a car insurance tax deduction?

In Canada, you can sometimes reduce your taxes with your car insurance costs, but only in certain cases, mainly if you use your car specifically for work. Here’s how it works:

Self-employed individuals

If your car is used for your own business, you can deduct motor vehicle expenses related to business use, including a part of your car insurance premiums. How much you can deduct depends on how much you use your car for work compared to personal trips. For instance, if you use your car for business 50% of the time, you can deduct 50% of your insurance costs.

Besides insurance, you can also deduct other actual vehicle expenses like fuel, maintenance, and repairs, again, based on the business-use percentage of your vehicle.

Employees

If your job requires you to use your own car (not just for getting to work and back), you might be able to deduct your insurance costs if you meet certain conditions and if your employer signs a Declaration of Conditions of Employment form (T2200). However, this is less common.

Can I deduct auto insurance for personal car use?

In Canada, the CRA doesn’t let drivers lower their taxes by claiming costs like car insurance premiums for personal car use. This means most people in Canada can’t reduce their taxes for things like trips and personal travel, commuting to and from work, gas, or car lease payments.

How do you calculate the difference between personal and business use?

To work out how much you can deduct, you must closely monitor your car use.

At the beginning of the fiscal year, note your kilometre total on your vehicle’s odometer. This will help you track how many kilometres you’ve driven throughout the year.

Write down every work-related trip, including when, where, and why you went (like visiting clients or going to work meetings). Make sure to track and write down the kilometres on your odometer for each work-related trip.

At the end of the year, add up all the kilometres you drove for business and all the kilometres for personal use. Then, figure out what portion of your driving is for work compared to all your driving. You can use this portion to figure out how much of your car insurance and other car costs you can deduct.

If you’re still not sure, here’s an example:

Imagine over one year, you drove 20,000 kilometres in total. Of these, 8,000 kilometres were for business, and 12,000 were for personal use.

To find out the percentage of your car use that is for business, use this formula:

Business use percentage: 8,000/20,000=0.4 or 40%

This means 40% of your driving was for business, and you can potentially deduct 40% of your car expenses on your taxes as business use.

How to deduct vehicle expenses on a Canadian tax return

To claim motor vehicle expenses on your taxes, follow these steps. Remember, it’s mainly for those using their cars for work (not just driving to and from work):

1. Determine your eligibility

First, see if you’re allowed to claim these expenses. If you’re self-employed or your job needs you to use your car for work, you might be able to.

2. Keep records

Write down every work-related trip, including when, where, and why you went and how many kilometres you drove. Also, keep all your car-related receipts, like for gas, repairs, insurance, and lease payments, as the CRA may ask for proof when you file your taxes.

3. Calculate your business use percentage

At the end of the year, look at how much you drove for work versus total driving. Take the total business kilometres and divide it by the total kilometres driven. This gives you a business use percentage. This is also where having noted the starting point for your kilometres at the beginning of the fiscal year comes in handy.

4. Calculate your deductible expenses

Use your work-driving percentage to figure out how much of your car costs you can claim. For example, if half of your driving is for work, you can claim 50% of your actual car expenses.

5. Fill out your tax return

There’s a spot for work or business expenses on your tax return. This is where you claim your deductible vehicle expenses. Make sure to fill out this section accurately based on your records.

Most self-employed individuals will complete the T2125 Statement of Business or Professional Activities form. (Those in farming and fishing will need to use other forms).

Employees earning a salary or commission will complete the T777 Statement of Employment Expenses form to report their employment expenses.

6. Consult a professional

Tax laws can be complex. If you’re unsure about something, talking to a tax professional or accountant might be a good idea to ensure you fill out everything correctly on your income tax.