Anyone who drives knows it’s expensive. Part of those elevated costs of car ownership are due to car insurance. In Canada we pay some of the highest auto insurance rates in the world. On top of this, if you don’t have a perfect driving record your rates can be even higher. But there are ways you can recoup some of those auto insurance costs on your tax return.
Here is what you need to know about how car insurance tax deductions work in Canada.
What is a tax deduction?
Tax deductions are amounts you subtract from your total income. They are legitimate expenses pertaining to your job, family situation or medical condition (to name a few.) This effectively makes your taxable income lower. Therefore you pay less income tax overall as your income is reduced. There are many expenses self-employed Canadians can write off, including motor vehicle expenses like car insurance, but there are some potential tax deductions that salaried employees can take advantage of too.
What qualifies as a car insurance tax deductible?
Anyone who is self-employed and uses their car for business can deduct motor vehicle expenses, including insurance costs.
Salaried and commission-based employees may also qualify for motor vehicle expense deductions if they had to use their own car for work and are required to work in a different locations separate to their employer’s place of business. Please note, this does not include your regular daily office commuting, that is not considered a legitimate motor vehicle expense for tax purposes.
Other vehicle expenses you can claim:
Assuming the use of your car is required for work, on top of car insurance you can also claim gas expenses, general maintenance and repairs. These are all considered motor vehicle expenses on your tax return.
How car insurance tax deductions work in Canada?
Whether you are self-employed or a salaried employees, if you use your car for work, for example to see clients, you can write off part of your car insurance premiums. You will have to declare how many kilometres on your personal vehicle you drive every year for work. Then use that percentage for tax purposes. This will determine how much of your car insurance you can deduct in taxes. For example if you drive your personal car 25 per cent of the time for work, you can deduct 25 per cent of the cost of your car insurance on your tax return.
It's best to keep a running log of vehicle mileage, as it will help you to determine work-related expenses and will be important if you get audited. Start by recording your mileage at the beginning of the tax year, and then at the end. When it comes to additional motor vehicle expenses, like gas and repairs - make sure to keep your receipts. You may also need to show proof of these expenses if you are ever audited.
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How to deduct vehicle expenses on your tax return?
How much you deduct is determined by how much you drive and what percentage of that is considered business travel. There is no limitation to the kilometres you can submit on your annual taxes. But the CRA must see it as being reasonable. It might be hard to claim you drove 100,000 km in one year as that is far above the national average, which is closer to the 15,000 to 20,000 km range. You may be asked to prove how many kilometres you drove so keeping good records of your mileage at the beginning and end of the year will help support any claims made.
Also, remember if you’re claiming motor vehicle expenses on your tax return make sure your keep receipts for all of your expenses. For up to seven years the CRA can ask you to prove you incurred that expense.
The bottom line
Owning a vehicle in Canada is not a cheap expense and paying for insurance is part of the car ownership experience. The truth is the cost of car ownership and insurance is only getting more expensive, as shown by the latest Consumer Price Index report. Though it is an unavoidable expense for many, it's not all doom and gloom when it comes to your personal taxes. If the use of your personal vehicle is regularly required for your work, no matter if you are self employed or an employee of a company, then you have the right to expense your insurance and other related motor vehicle expenses.
Just remember to keep a good record of all your vehicle expenses in case you are ever audited - failure to show proof of your deductions could result in fines that far outweigh the savings the deductions provided.
Unfortunately, if your vehicle is just for personal use than there are currently no tax deductions available to you. But you can check these out if you are looking for ways to save on car insurance.