Who Can Deduct Car Lease Payments?
If you lease a vehicle for business use, you may be eligible to deduct a portion of the lease payments.
Self-Employed
As a self-employed individual, you can deduct the business-use portion of your car lease. For example, if you use your vehicle 75% for business and 25% for personal use, only 75% of your lease payments are tax deductible.
Employees
Employees can also deduct car lease payments if they meet the CRA’s requirements. You can claim deductions if:
- You earn commissions and meet the criteria for commission employees.
- You earn a salary and meet the criteria for salaried employees.
To learn more about employee deductions, check out Top Tax Deductions and Credits in Canada.
How to Deduct Car Lease Payments
To claim car lease deductions, both employees and self-employed individuals must complete Chart C – Eligible Leasing Cost for Passenger Vehicles on Form T2125, Statement of Business or Professional Activities.
How Much Can You Deduct?
As of January 1, 2024, you can deduct up to $1,050 per month for new car leases, totaling $12,600 annually before taxes.
Example:
If you lease a vehicle for $8,000 annually and use it 75% for business, you can deduct $6,000 from your taxable income. If the car is used exclusively for business, you can deduct 100% of the lease payments, subject to the $1,050 monthly cap.
For more insights on maximizing deductions, read our article on Maximizing Year-End Financial Moves.
Tax Benefits of Leasing vs. Buying a Car for Business
Leasing a Car
- Full Deduction: If your vehicle is used 100% for business, you can deduct the full amount of the lease payments.
- Partial Deduction: If used for both business and personal purposes, deduct only the business portion.
Buying a Car
When you purchase a car for business, you can claim deductions using the Capital Cost Allowance (CCA), which lets you depreciate the vehicle over time. You can also deduct the interest on a car loan.
Limits and Thresholds
Self-Employed Individuals
The amount you can deduct is based on your lease payments and the value of the vehicle. Additional rules apply if you’re earning farming or fishing income. Don’t forget that lease payments include taxes, while insurance and maintenance are separate expenses. Record insurance and maintenance in Chart A – Motor Vehicle Expenses on Form T2125.
Employees
Employees should remember that insurance, maintenance, and taxes are generally not included in lease payments. Record these separately on Form T777. For older lease agreements, refer to the 2008 version of Guide T4044.
Frequently Asked Questions (FAQ)
Can I Deduct Lease Payments for the CRA?
Yes, if the vehicle is used for business purposes, either as a self-employed individual or employee, you can deduct the business-use portion of your lease payments.
How Much Lease Can I Deduct in Canada?
As of 2024, you can deduct up to $1,050 per month, which amounts to $12,600 annually for car lease payments.
How Should I Handle Lease Down Payments?
Ensure you understand how each payment applies to the principal and interest before signing a lease. Proper budgeting for the ongoing expense is essential.
For more tips on tax deductions, visit our guide on Filing and Payment Deadlines for 2023