Is Your Car Insurance Tax Deductible in Canada?
Tax season is swiftly approaching, which means that Canadians are starting to tally up their expenses, round up their receipts and dust off their calculators.
If you own one or more vehicles, you're likely wondering, "is my car insurance tax deductible?". You can find the answer to this question, and several more, in the following paragraphs.
What does "tax deductible" mean and why are they important?
Before we dive into the topic at hand, we should take a moment to go over the basics.
So, what exactly does "tax deductible" mean?
For starters, a tax deductible (not to be confused with your car insurance deductible) is a type of incentive offered by the Canadian government. Tax incentives are financial perks and discounts that encourage Canadians to be transparent about their spending habits.
In this case, a tax deductible allows you to reduce your taxable income by including expenses that are related to your vehicle. A portion of these expenses is removed from your annual taxable income, which, in turn, reduces the amount you owe to the government at the end of the fiscal year.
Simply put, a tax deductible allows you to reduce your income tax by subtracting specific expenses from your taxable income.
Is car insurance tax deductible in Canada?
Yes and no — the answer depends on how and why you use your vehicle.
Personal usage of vehicle
Unfortunately, the Canadian government generally doesn't allow drivers to deduct vehicle expenses, like insurance, related to personal use from their taxable income.
Because of this, most Canadian drivers cannot write off expenses related to the following:
- Travel and personal transportation
- Lease expenses
Work-related usage of vehicle
If you're currently asking yourself, "is car insurance tax deductible for self employed Canadians?", we think that you'll be pleased to hear our response.
If you're self employed in Canada, you're able to write off a long list of vehicle-related expenses (as long as you use your vehicle for work).
The Canada Revenue Agency (often shortened to CRA) enables business owners to deduct a portion of the following expenses from the taxable income:
- Car insurance
- Vehicle maintenance and repairs
- Tires (including winter tires)
- Renewal of license and registration
These are just a handful of expenses that you can potentially write off if you're self employed. For a complete list of deductible expenses, reach out to your certified tax accountant (CPA).
Are there any exceptions to this rule?
As with every rule, there are a handful of exceptions when it comes to tax deductibles. If an employed Canadian meets the following criteria, they may be able to get a deductible in car insurance expenses.
Criteria for non-self employed Canadians
- You are required to work away from the employer's primary place of business regularly (or work in a variety of locations)
- You covered the cost of your motor vehicle expenses that resulted from your employment (and the employer didn't reimburse the costs)
- You were never given a non-taxable allowance for your vehicle expenses (after being required to drive by your employer)
- You have a completed and signed Form T2200, Declaration of Conditions of Employment
If all four requirements are met, you can write off vehicle expenses, like car insurance, at the end of the fiscal year (even if you aren't self employed).
How do you calculate the difference between personal and business use?
Do you use your vehicle for personal and business use?
If so, then you need to differentiate the personal and business usage of your vehicle. This is because drivers can only write off a portion of their business-related expenses, not personal expenses (even if they are self employed).
Calculating the business use of your vehicle may seem like a challenge, but it's quite simple — all you need to do is keep a detailed log of your travels.
At the beginning of the fiscal year, take note of the kilometre total on your vehicle's odometer. This gives you a base number to work with in the future.
Once this is done, make sure that you note the kilometre total before and after you use your vehicle for self employment. You then need to subtract the first total from the last total. Doing this will help you determine the total amount of business-related kilometres that you drove that day. Complete this step every time you use your vehicle for self employment.
At the end of the year, be sure to note the total number of kilometres driven on the odometer and add up all of the business-related kilometres that you've travelled. Next, you need to divide the business-related kilometres by the total number of kilometres and multiply that number by 100.
Doing this will give you the percentage of your vehicle-related expenses that you can deduct from your taxable income.
Are you still feeling confused?
Don't fear — this simple example should help clear things up:
Let's imagine that a driver has accumulated 25,000 km over the past fiscal year. Thanks to their driving log, the driver is able to determine that approximately 7,500 km were related to self employment.
When you divide 7,500 by 25,000, you get 0.3. Doing this simple equation shows us that the driver can write off approximately 30% of their car insurance expenses for that year. If said driver paid $2,000 for auto insurance, they would save roughly $600.
With this in mind, it's clear why so many self employed Canadians take the time to calculate their usage at the end of every fiscal year.
Bonus tip — If you're employed by a business and meet the criteria listed above, you will follow the same steps as a self employed worker.
What have you learned about deducting vehicle expenses?
If you're self employed or are required to use your vehicle for work regularly, you should take advantage of this fantastic incentive. Keeping track of your business-related kilometres can help you save hundreds of dollars on insurance.
If you're currently looking for more ways to save on car insurance, don't hesitate to reach out to your local insurance advisor.