Are Car Loan Repayments Tax Deductible?
Many people look to finance their cars when they purchase them through taking out car loans in Oakville.
A car loan allows you to spread the outright cost of a new car across several years, minimising the impact on your cash flow and allowing you to afford a car that otherwise might be outside of your price bracket. Something many people aren’t sure about is how a car loan can impact your tax return.
So can car loan repayments be deducted off your taxable income?
There are several important things to consider when answering this question that will affect your eligibility and how much you can claim back. Read our ultimate guide below and find out whether you could be saving even more money with a car loan in Oakville!
Can I claim my car loan repayments on my tax return?
First off, you will want to understand if you are eligible to claim any car loan repayments on your tax return.
The Canada Revenue Agency allows for certain tax deductions when it comes to automobiles. To be eligible for a tax deduction, you need to be using your vehicle to drive to locations necessary for your job. This would include scenarios such as driving to meet clients at their offices, heading to conventions or seminars, or travelling for sales as a salesperson.
You cannot claim loan repayments for cars that are used exclusively to drive between your home and your office, or used exclusively for personal use. This means that if you are only using your car for personal errands, or you only commute to your workplace, but do not drive to work related locations other than your office, you are not able to claim these expenses on your tax return. However, if you commute to your office and then drive from your office to a client meeting, that will enable you to claim some portion of your car loan in Oakville on your tax return.
It is also important to note that you can only claim car loan repayments on your tax return if you employer does not already reimburse you for mileage, gas, or other automobile associated costs. This is to prevent people from “double dipping” when it comes to tax credits, as your employer will claim these expenses themselves with the CRA when they do their tax return.
What Automobile Expenses are allowed?
Now that you have determined that you might be eligible to claim some of your Oakville car loan expenses on your tax return, it’s time to see what expenses you are actually able to claim.
Allowable expenses are what the CRA deems to be reasonable costs associated with running and maintaining a vehicle for professional use. These cover a wide range of aspects including:
Repairs & Maintenance
This refers to any money you might have paid throughout the year for necessary repairs or maintenance to your vehicle to keep it road worthy. This will be things like oil changes, tune ups, repairing broken windows or mirrors, tyre changes, and brake pad replacement. Again, to be eligible to claim these Oakville car loan repayments on your tax return, your employer must not be covering or reimbursing you for these expenses already.
Constituting one of the largest allowable expenses is the fuel you use to get to your destination. This can include petrol, electricity, or hydrogen fuel, depending on what your car runs on. Again, only the portion of fuel that you use to drive to locations required for your job that aren’t your office are deductible.
Another big expense that can be potentially claimed on your tax return is your auto insurance. This refers to your premiums and any excess you might have paid for any kind of accident throughout the year.
License & Registration
Any fees you pay to legally register your vehicle for operation in Canada can potentially be claimed on your tax return. This can include your vehicle permit, license plate costs, and license plate sticker cost.
If you chose to lease your vehicle instead of getting a car loan in Oakville, you can potentially claim some of the lease payment costs on your tax return. Again, the CRA will determine whether you use your vehicle mainly for personal or work use and adjust your claiming thresholds accordingly.
If you took out a car loan in Oakville to finance your car, you can claim some portion of the interest component of your repayments on your tax return. This will have a varying impact on your tax return, depending on what interest rate you have on your car loan.
Capital Cost Allowance
While interest payments make up one part of your car loan repayments, the other part is the capital amount you borrowed, which generally equates to the cost of the car. This figure will depend on the make and model of the car you have, how much you paid for it, and how old it is.
What is the Capital Cost Allowance?
As mentioned above, you may be eligible to claim some part of the capital cost of your car.
The Capital Cost Allowance refers to the total amount you are allowed to claim on your tax return based on the overall cost of purchasing your car. Exactly how much this is will depend on your specific car, including the make, model, and how much you paid for it. The CRA determines these allowances based on the information from the market and the figures you provide during your tax return. This can also include any expenses directly or indirectly involved in the purchasing of the car, such as import fees or delivery charges.
What are allowable Interest Expenses?
Something that will be of great interest to anyone who has taken out a car loan in Oakville will be how much of the interest payments the CRA allows to be claimed on your tax return.
Your allowable interest expense is calculated by looking at the total amount of interest paid throughout the year or $10 and multiplied by the total number of days the automobile was used for work. Whichever figure comes out as lower will be the deductible amount from your automobile expenses. This can help recoup some of the interest expenses from a car loan in Oakville and give you a nice little bonus when it comes to tax return time.
What about mixed use vehicles?
The one key thing that must be considered when determining tax deductions on car loans in Oakville is how exactly you use your vehicle.
The CRA only offers tax provisions for cars that are used, at least in some capacity, for employment purposes. This means that you can only claim for vehicles that are used to drive to work locations other than your main office. Thus, a regular commute from your home to the office would not qualify for tax deductions. If you use your vehicle for both personal and work related reasons, you will need to determine what percentage of your driving hours go towards each aspect. This percentage will then determine how much you are eligible to deduct from your tax return.
For example, let’s say you have calculated your total vehicle expenses at $2,000 for the tax year. If you are a salesperson that uses their car 50 percent of the time for driving to client meetings and 50 percent of the time for your regular commute, grocery shopping, and personal travel, you are eligible to claim 50 percent of your total expenses, meaning you can claim $1,000.
Something to keep in mind for mixed use vehicles is that you are obliged to keep a record of the total kilometers you have driven and an accurate percentage of the number of days you used the car for personal and professional use. If they choose to audit you, the CRA can request these kilometer figures to determine whether they match with your car’s odometer and can request money back if you are unable to produce the appropriate records.
How much can you save on a car loan in Oakville?
Depending on how much you use your vehicle for work, the savings on your car loan could add up very quickly on your tax return.
If you use your vehicle almost exclusively for work, and either use transit, drive a partner’s car, walk, or bike for personal use, you can expect to claim back a significant portion of your vehicle expenses on your tax return. This includes your car loan repayments, made up of both your interest and capital payments.
Depending on the make, model, and age of your vehicle, you could save some serious cash on your return, lowering your taxable income and potentially even moving down a tax bracket. This can lead to a nice bonus from the CRA, which you can invest, save, splurge, or apply to other expenses.
How do calculate your total vehicle expenses?
This is the crux of the issue and requires some detailed record keeping and some mathematical skills.
You will want to keep receipts of every expense you have related to your car throughout the year. A wise move is to get the receipt and then take a photo of it on your phone straight away so you have a digital record as well. Come tax time, you will need to add up all of these receipts to come up with a total figure for how much you spent on your car. You will then need to compare this to how many days you believe you spent using the car for professional versus personal use and turn this into a percentage. You then apply that percentage to the total amount spent and enter that into your tax return.
Many people would suggest going to an accountant to help with determining how much you can claim on your tax return. Not only do accountants know all the ins and outs of tax law, they will be able to tell you what you can and can’t claim, sometimes even offering you new ways to save on your car loan in Oakville. You can even claim the cost of the accountant on your tax return the following year!