Under certain circumstances, car insurance costs are deducted from employment earnings. Now, not everyone can dig out their car insurance bills and deduct the costs from their income. As with many tax situations, there are conditions. A motorist who doesn’t meet these can’t deduct costs. Even when meeting conditions the total amount of an auto insurance policy can’t be claimed.
Allowable Motor Vehicle Expenses
If you’re an employee, you must meet four conditions before you can claim car insurance premiums as a tax deduction. The Canada Revenue Agency spells these conditions out specifically:
- You’re required to work away from your employer’s place of business or in different places.
- Under your contract of employment, you paid your own motor vehicle expenses and were not reimbursed for these by your employer.
- You did not receive a non-taxable allowance for motor vehicle expenses. This usually takes the form of a per-kilometer amount, declared on an expense claim.
- You have a copy of Form T2200, Declaration of Conditions of Employment, completed and signed by your employer.
(Source: Canada Revenue Agency)
Calculating the Business Portion of Vehicle Use
When you drive a vehicle for both personal and business reasons, only the business portion deducts from income. A mileage log is the most common way to calculate business use. If a driver shows business use to the CRA, the log is usually accepted as proof.
A simple log form takes the odometer reading for the vehicle at the start of the tax year. Each time the driver uses the car for business purposes, they record both the beginning and ending odometer readings for that trip. Subtracting the end reading from the beginning gives total kilometers for the trip. At the end of the year, the motorist adds up the individual trips, giving the total kilometers of business use. Then the motorist subtracts the year’s starting odometer reading from the end of the year amount. This gives the total kilometers driven. Dividing the business total by the annual total and multiplying the result by 100 gives a percentage value of business use. This percentage of the car insurance bill is tax deductible.
To illustrate, let’s say a driver puts 22,000 km on a car in the full year. Using a mileage log, the driver calculates that business use accounted for 3,000 km over the year. Dividing 3,000 by 22,000 equals about 0.14, rounded off. Multiplying this by 100 equals 14 percent. If the driver has an average car insurance bill of about $1,600, $224 of that amount is claimed on their tax return as an allowable business expense.
Self-Employed Individuals and Auto Insurance Expenses
The calculation procedure for a self-employed person is the same as for an employee. Self-employed people have greater leeway, able to claim any reasonable business expense. They don’t need to meet the four conditions that an employee does.
Business Use and Commercial Insurance
Personal vehicles used for business purposes may not be protected by a personal car insurance policy without the purchase of additional coverage. Talk to your agent or broker about adding commercial endorsements to your policy.