Vehicle Expenses: What Can a Small Business Deduct?

Who owns the vehicle, and how does the cost reach the books?

A sole proprietor and the business are the same person, so the vehicle is yours and so is the claim. You add up the year’s vehicle costs and claim the part that matches your business driving on Form T2125, the statement of business or professional activities, with capital cost allowance for the vehicle on a line of its own.^2,3 Parking for business and supplementary business insurance count in full.²

A corporation is a taxpayer of its own, so what matters is whose name the vehicle is in:

• The corporation owns or leases it. The corporation deducts the costs, within the limits below, and anyone who also drives it personally has a taxable benefit for that use.⁵
• You own it and drive it for the corporation. The vehicle and its costs stay yours. As its employee, you can be paid a reasonable per-kilometre allowance or reimbursed for what you spent driving for it, and the corporation deducts that instead.⁷

What logbook does the CRA expect?

The CRA’s best evidence of business use is a logbook kept for the whole year, showing for each business trip the date, the destination, the purpose and the kilometres driven.¹ You also record the odometer at the start and end of the year, and whenever you buy, sell or trade a vehicle.¹

There is a lighter way after the first year. Once a full year’s logbook has set a base year, a sample logbook kept for three months can stand for a later year: the year’s business use is worked out from the sample and the base year, and it can be used as long as it stays within ten percentage points of the base year’s.¹ If it moves further than that, the sample covers only its own months, and a new full-year logbook is the way back.¹

Each vehicle used for the business needs its own record, with its own costs.¹ Our client portal includes a vehicle logbook for clients who drive for their business.

How is the business-use share worked out?

Divide the kilometres driven to earn income by the total kilometres driven in the year, and apply that share to the year’s vehicle costs.^2,8

For an employee, the CRA generally treats driving between home and a regular place of work as personal, while a trip from home straight to a client’s site can be business driving.⁷

What can you deduct?

The CRA lists the vehicle costs a business can claim:³

• licence and registration fees
• fuel and oil, or electricity for a zero-emission vehicle
• insurance
• interest on money borrowed to buy the vehicle
• maintenance and repairs
• leasing costs

A vehicle you buy is not an expense in the year you buy it. Its cost is claimed over time as capital cost allowance (CCA), at the rate set for its class.^3,9

Passenger vehicles carry limits on CCA, interest and leasing costs, and most cars, station wagons and vans are passenger vehicles, as are some pickup trucks.⁴ A van or pickup used mainly to carry goods or equipment for the business can fall outside that definition, depending on its seating and how it was used in the year it was bought or leased, and then the limits do not apply.⁴

What are the limits on passenger vehicles?

Each limit is set by the year the vehicle was bought, the loan taken out or the lease signed, and the vehicle keeps that year’s limit for good.^9,10

A passenger vehicle that costs more than the ceiling goes in Class 10.1, in a class of its own, and its CCA is worked out on the ceiling plus the sales tax on it rather than on the whole price.⁹ Zero-emission passenger vehicles have a separate, higher ceiling.¹⁰

The leasing limit is one of several tests: another, built from the vehicle’s list price, can bring the deductible amount lower still.¹¹

Buying or leasing: how do the deductions differ?

When you buy, the deduction comes as CCA spread over several years, plus the interest if you borrowed. When you lease, it is the lease payments themselves, within the leasing limits.^3,11 For a sole proprietor, only the business-use share of either counts.

Which costs less over the vehicle’s life depends on the price, the term, how long you keep it and the business share of the driving, so there is no general answer. It is worth working through before signing, not after.

What if a company vehicle is driven personally?

When a corporation makes a car available to an employee who also drives it personally, the employee has a taxable benefit, reported on their T4, in two parts:⁵

• A standby charge, for having the car available. For a car the corporation owns, it is 2% of the car’s cost for each 30-day period it is available; for a leased car, two-thirds of the lease cost.⁵
• An operating cost benefit, when the corporation pays the running costs of personal driving: generally 34 cents for each personal kilometre in 2026.^10,12

The standby charge can be reduced when the employee has to use the car for work, drives more than 50% of the distance for business, and keeps personal driving to no more than 1,667 kilometres per 30-day period, or 20,004 for a full year.⁵ The logbook is what shows it.

An owner who is not on the payroll is a different case. Personal use of the corporation’s car is then a shareholder benefit: it goes on a T4A rather than a T4, no payroll deductions are taken from it, and the corporation cannot claim it as a business expense, unlike an employee benefit.⁶ Its value is worked out as though the standby charge and operating cost rules applied.¹³

So for an owner off the payroll the logbook matters twice: it supports what the corporation claims for business driving, and it measures the owner’s benefit for the rest. Whether a driver is an employee, an owner or both is a question about the people, not the car, and it is worth settling before the first year-end.

What about a per-kilometre allowance instead?

When an employee drives their own vehicle for work, the employer can pay a per-kilometre allowance. The CRA generally considers an allowance at the rates set in the Income Tax Regulations reasonable, and those rates are also the most the employer can deduct as a business expense.⁷ A reasonable allowance is not taxable to the employee.⁷

For 2026 the rates are 73 cents a kilometre for the first 5,000 kilometres and 67 cents for each kilometre after that, with higher rates in the territories.^10,12

The allowance has to follow the kilometres actually driven, and the employee keeps a record of them. A flat monthly amount, or an allowance paid on top of a reimbursement for the same driving, is generally taxable.⁷

Keeping it straight through the year

Vehicle costs are easiest to claim when they are recorded as they happen. With monthly bookkeeping, fuel, insurance, repairs and loan or lease payments are sorted through the year, so the business-use share has something to apply to.

At year-end the CCA and the business share go into the return. We prepare and file the corporation’s T2 return; for a sole proprietor, the same figures go on Form T2125 with the owner’s personal return.

Frequently asked questions