Car Expenses for Canadian Business Owners: What You Can Deduct (2026 Guide)

Last updated: April 2026 — figures reflect current CRA limits for the 2026 tax year.

Access to a car can be crucial to running a small business effectively.  Costs of ownership, however, can be high relative to your revenues, especially in the early stages when your business is not hugely profitable.  Luckily, Revenue Canada (CRA) and Revenue Quebec (RQ) allow both unincorporated/self employed individuals and owners/employees of corporations, who use their cars to generate income, to deduct the relevant expenses. Both CRA and RQ provide detailed guidance and have specific rules relating to the write off of car expenses.  I discuss some of the main provisions that impact small business owners in this article and provide guidance on the differences between unincorporated (self employed/small business) owners and corporations.

---

---

General Rules for Deductibility of Car Expenses (Both Incorporated and Unincorporated Businesses)

What is the Maximum Cost Of Car That is Eligible for Tax Deduction

If you purchase your car, the maximum amount eligible for capital cost allowance (CCA) is $39,000 + sales taxes for vehicles acquired on or after January 1, 2026. This ceiling was $38,000 for 2025, $37,000 for 2024, and $36,000 for 2023. CRA has been increasing this limit annually .

What is the Portion of The Car That You Can Expense (Capital Cost Allowance)

While you may not write off the full amount of the car purchase price as an expense in the year that you buy it, you are allowed to claim the capital cost allowance on an annual basis. Capital cost allowance is essentially the term that CRA uses for depreciation rates. The CCA rate for passenger vehicles is 30%, applied annually to the declining balance. A car costing $39,000 or less (before tax) in 2026 falls into Class 10, while a car costing more than $39,000 falls into Class 10.1. In the first year of purchase, the half-year rule applies, meaning you can only claim 50% of the normal CCA amount.For subsequent years the deduction is 30% of the remaining balance after deducting CCA already taken and is referred to as the undepreciated capital cost or UCC.

Example of Car Purchase tax Deduction (calculation of CCA):

Example of Car Purchase Tax Deduction (2026 figures):

If you purchase a car for $35,000 (which falls under the $39,000 ceiling):

Year 1: $35,000 × 30% × 50% (half-year rule) = $5,250

UCC at end of Year 1: $35,000 − $5,250 = $29,750

Year 2: $29,750 × 30% = $8,925

UCC at end of Year 2: $29,750 − $8,925 = $20,825

Note that Year 2 CCA is higher than Year 1 since the half-year rule no longer applies.

See also my article on how to do the accounting for car expenses and reflect personal use.

Accelerated Investment Incentive Property (AIIP) — Note for 2026

If you purchased your car after November 20, 2018 and it is available for use before 2028, it may qualify as Accelerated Investment Incentive Property (AIIP). This applies to both sole proprietors (reported on Form T2125) and corporations.

For cars purchased in 2026, AIIP suspends the half-year rule, meaning you can claim the full 30% CCA rate in Year 1 rather than the usual 15% (30% × 50%). Using the example above, a $35,000 car purchased in 2026 would have a Year 1 CCA of $10,500 ($35,000 × 30%) rather than $5,250 — doubling the first-year deduction.

Note that AIIP is in a phase-out period and will no longer be available for property acquired after 2027. The calculation method has also changed since 2023, so confirm the current rules with your accountant before filing.

What is the Maximum Deductible Lease Cost

Lease costs are generally deductible up to a maximum of $1,100 per month + sales taxes for new leases entered into on or after January 1, 2025 and 2026. This was $1,050/month for leases entered into in 2024, $950 for 2023, and $900 for 2022. Note that the limit that applies is based on the year the lease was entered into, not the year payments are made so if you signed your lease in 2024, your deduction limit is still $1,050/month even in 2026. CRA's full calculation method can be found here.

Should You Lease or Buy your Car

There are a variety of factors to consider when deciding whether to lease or buy a car that you should review. Significantly, a lease generally lasts for a shorter period and the car does not belong to you at the end of the lease period (although there is often a purchase clause) whereas with a purchased car (with or without financing), you usually own the car at the end of the financing period or outright if you pay for it upfront. The choice you make is often a lifestyle one and dependent on whether you prefer to replace your car regularly or are happy with the same car for a longer period. Also, the value of the car at the end of the financing term might contribute to your decision.

What Types of Costs Relating to your Car are Deductible

Cost relating your car that can be written off as expenses include:

• lease payments

• interest on financing

• gas or fuel costs,

• insurance

• repairs and maintenance,

• license and registration fees

• drivers license

• parking

• CCA on purchased/financed cars

What is An Automobile Log and What Should Be Included

The business owner should keep an automobile log of kilometres driven for business that includes:

• name of customer, supplier or other business purpose, For example, if you drive to meet your accountant it would be considered to be deductible.

• odometer readings at the begining of the year and at the end of the year

• # of kms driven for each trip relating to business,

• date of travel.

It should be noted that when computing kilometres used for business purposes, travel from the home to your regular place of employment is not considered to be deductible. If a business owner works out of their home office then any travel from the home office would be included in the number of kms driven and counted as business travel. If, as a business owner, you have a separate office that is not your home, then the same restriction applies regarding travel from your home to your business office not being deductible travel.

Electric and Zero-Emission Vehicles (2026)

If you are considering purchasing an electric vehicle (EV) or plug-in hybrid with a battery capacity of at least 7 kWh for your business, these fall into CCA Class 54 with a higher ceiling of $61,000 (before tax) for 2026 — significantly more generous than the $39,000 cap for regular passenger vehicles.

Additionally, the federal Electric Vehicle Affordability Program (EVAP), launched February 2026, replaced the previous iZEV incentive and provides purchase incentives for eligible zero-emission vehicles. If you are purchasing a vehicle in 2026, it is worth checking the current EVAP criteria at canada.ca before making your decision.

Note: proposed legislation may allow 100% immediate expensing for zero-emission vehicles acquired between 2025 and 2029 — confirm the status of this with your accountant before filing, as it had not yet been fully enacted at the time of writing.

Car expenses for unincorporated owners (self employed and sole proprietorships)

Advice on how to deduct car expenses for sole proprietors/unincorporated businesses

• Expenses relating to your car are reflected on a specific section of the T2125 schedule of your personal tax return called “motor vehicle expenses”

• ALL costs must be reduced, on a pro rata basis, by the percentage that the car is used for personal purposes. This percentage is based on the number of kilometres driven for business vs those driven for personal purposes.

  For the purposes of the T2125, you will need

  a)business kms driven during the year

  b) Total kms driving during the year

  Divide a) by b) to arrive at the business % use that can be applied to the expenses listed above.

• The cost of the car can be depreciated based on the business % used during the year up to a maximum cost of $39k (starting in 2026).

• The CCA (capital cost allowance) class for most cars is Class 10 if the car costs $39k or less OR Class 10.1 if the car costs more than $37k.

• Cars included in class 10.1 must have a separate category for each car. If you sell the car at a loss, you are not allowed to deduct the loss (known as a terminal loss). Similarly, if you sell your car at a price higher than the depreciated value (known as undepreciated capital cost or UCC), you do not have to reflect it as income (known as recapture).

• Interest expenses on the financing of a car can also be deducted.

• If you are registered for GST (and HST/QST), you can claim a portion of the sales taxes which is based on the CCA rate that you claim in each year.

• The example below shows the CCA claim in year one (incorporating the half year rule) + the amount of sales tax that can be claimed. The amount of the sales tax is simply added to the GST/HST input tax credits amount.

Example: Calculating HST Claimable on a Car Purchase

If you purchase a car for $25,000 in Ontario, you will pay 13% HST, for a total of $3,250 in sales tax. However, you cannot claim the full HST — you can only claim the portion that relates to both your business use and the CCA you are claiming that year.

Assuming 75% business use, a 30% CCA rate (Class 10), and the 50% half-year rule in Year 1, your CCA claimable in Year 1 on the cost of the car is $2,812.50 ($25,000 × 30% × 50% × 75%). The HST claimable is then calculated as 13/113 × $2,812.50 = $373.89.

Note that the HST claimable on operating expenses such as gas, insurance and repairs is simpler as you can claim the full business-use percentage of the HST paid on those costs directly, without the CCA adjustment.

Car expenses for employees and/or owners of corporations

Corporations have more flexibility when claiming car expenses. There are three options for claiming the car expense deduction if you are an owner or employee or owner of a corporation:

Reimbursement for Per Km Rate Allowed by CRA

• The simplest option for an owner and/or employee of a corporation is to claim the per km rate allowed by Revenue Canada. For 2026 this rate is $0.73 per km for the first 5,000 kms of business travel and $0.67 per km for each km exceeding 5,000 kms. (For 2025 the rate was $0.72/$0.66 per km; for 2024 it was $0.70/$0.64 per km; for 2023 it was $0.68/$0.62 per km.) These rates are updated each January — check canada.ca for the most current figures.

• The corporation may pay/reimburse the employee/owner the amount calculated under this method without any tax consequences. This will also be considered to be an expense to the corporation and should be debited to the automobile/vehicle expense account.

• If this method is selected, no other expenses relating to the car may be claimed.

• The employee/owner must keep a log of kms driven for business to support the amount of kms claimed.

• Since the owner/employee only needs to keep a log of kms and not the individual expenses incurred or the total kms driven, this method can significantly reduce administration costs. Also, with this method there is no automobile taxable benefit to enter on the T4 slip and no additional taxes to pay.

Corporate ownership of Car

• The corporation may purchase the car for use by the employee or owner. In this case, the corporation can claim 100% of the expenses relating to the car including lease or interest payments and depreciation (subject to limits discussed above).

• The direct purchase of a car by a corporation results in a taxable benefit to the employee/owner for the % of personal usage of the car and must be reflected on their T4. An automobile log must be maintained that shows the percentage of personal vs business use. The taxable benefit can be calculated by using CRA’s calculator.

• If the car is used less than 50% of the time by the employee/owner the taxable benefit and resulting tax burden is significantly higher than if the per km method is used. It is therefore advisable to calculate the potential taxable benefit on a corporation owned car vs simply taking the per km rate explained above.

Fixed monthly/periodic car allowance

• A corporation may decide to give its employee(s) a fixed monthly car allowance. This will be tax deductible to the corporation, however, the full amount of the car allowance must be reported as income on the T4 for the employee.

• The employee may then deduct their expenses, listed above, on their personal tax return on Schedule T777 which is the schedule of employment expenses and has a specific section for motor vehicle expenses. Note that in order to claim the expenses, the employer must complete and sign the T2200 which shows that the employee used the car for business purposes.

Revenue Canada , while recognizing the deductibility of automobile expenses, wants to ensure that businesses don't benefit from personal use of car (since individuals who are not business owners generally don't have this option).  Ultimately, common sense should be used -  expenses incurred to earn income are deductible.  Expenses that are clearly personal in nature are not.

Interested in improving your financial literacy? Sign up for my newsletter for expert insights on tax, finance, and accounting, Designed for solopreneurs and small business owners.