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.
Can you claim motor vehicle expenses as a tax deduction?
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:
- You usually work from a location other than your employer's place of business
- Your contract of employment stipulates that you alone cover motor expenses. If your employer offers to pay for them, or if you refuse such an offer, you cannot claim motor vehicle expenses
- Your employer gave you no non-taxable (i.e., based on a reasonable per-kilometre rate) allowance for motor vehicle expenses
- Your employer completed and signed Form T2200, Declaration of Conditions of Employment.
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.
Self-employed car loan interest and motor vehicle deductions
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:
- Motor vehicle: used on highways and streets. Does not include: trolley or any similar vehicle that runs on rails
- Passenger vehicle: carries people (a driver and no more than 8 passengers) on highways and streets. Includes most cars, vans, and some pick-up trucks.
To deduct interest on passenger vehicle loans, take the lesser amount of either:
- Total interest payable for the year, or
- $10 x the number of days for which interest was payable. (For vehicles purchased between December 31, 1996, and January 1, 2001, only: use $8.33).
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.
What are the 2018 car loan interest deduction limits?
For vehicles acquired after 2017, the maximum allowable monthly interest deduction is $300.
Should I lease or buy a business vehicle?
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.
