Interest on car loans may be deductible if you use the car to help you earn income. Interest on loans is deductible under CRA-approved allowable motor vehicle expenses. Read on for details on how to deduct car loan interest on your tax return.
For salaried employees, if you use a car for business purposes, the CRA allows you to deduct motor vehicle expenses provided all of the following apply:
The T2200 form clarifies all of the above conditions and ensures that your situation meets the terms under which you can deduct motor vehicle expenses. Make sure to keep it among your records! It's as important as tracking mileage. Employees report motor vehicle expenses on Form T777, Statement of Employment Expenses.
While the CCA offers tax relief for the overall cost of the vehicle, self-employed workers and business owners can also deduct interest on car loans. The amount of the deduction depends on whether it's a passenger vehicle or a motor vehicle. The CRA defines each as follows:
To deduct interest on passenger vehicle loans, take the lesser amount of either:
Self-employed workers report motor vehicle expenses on the T2125 Statement of Business or Professional Activities form. Interest on loans is reported in Chart B of the T2125 form. Farming businesses use Form T2042, and fishing businesses use Form T2121.
For vehicles acquired after 2017, the maximum allowable monthly interest deduction is $300.
Wondering whether it would be better to lease or buy? The CRA offers this handy calculator to weigh the pros and cons of each option.