Vehicle Expenses for the Self-Employed: Actual Costs vs Per-Kilometre Method – A Complete Guide by a Montreal CPA Firm Near You

Claiming vehicle expenses is one of the most important deductions available to self-
employed Canadians, yet it is also one of the most frequently audited. Many
freelancers, contractors, gig-economy drivers, and sole proprietors rely heavily on their
vehicles for business activities, but misunderstand CRA’s rules. CRA allows two
different ways to claim vehicle expenses: the actual expense method and, in limited
cases, the per-kilometre method. Choosing the wrong method, failing to keep mileage
logs, or mixing personal and business use often leads to denied deductions and
reassessments. Understanding how to properly claim vehicle expenses on Form T2125
ensures compliance, maximizes deductions, and protects you from CRA audits.
Legal and Regulatory Framework
CRA’s rules for vehicle expenses are governed by the Income Tax Act, the Excise Tax
Act for GST/HST, and CRA’s official motor vehicle guidelines. Self-employed individuals
may deduct vehicle expenses under section 18(1)(a) if the cost was incurred for the
purpose of earning income. CRA permits two methods:

1. Actual Expense Method (Most Common)
   This method requires tracking:
   • fuel and oil
   • repairs and maintenance
   • insurance
   • licence and registration fees
   • interest on car loans (subject to CRA limits)
   • lease payments (subject to CRA limits)
   • capital cost allowance (CCA) if the vehicle is owned
   You must track total annual kilometres and business kilometres. The deductible
   portion is:
   Business km ÷ Total km × Total vehicle expenses

2. Per-Kilometre Method (Only When Paid by Clients or Employers)
   Self-employed individuals may use CRA’s prescribed per-km rate only when a client or
   employer reimburses them per kilometre driven.
   This is not a general alternative method for sole proprietors—the per-km method cannot
   be used on T2125 unless tied to reimbursements.

Recordkeeping Requirements
CRA requires:
• a full-year mileage log, or
• a three-month sample log extrapolated to full year (if stable business patterns exist).
Receipts for all vehicle expenses must be kept for six years. These rules create the
legal foundation for claiming vehicle expenses for the self-employed in Canada.
Key Court Decisions
Multiple court cases reinforce the importance of mileage logs and accurate allocation.
In Goddard v. Canada, CRA denied vehicle expenses because the taxpayer failed to
maintain mileage logs. The court agreed with CRA’s strict requirement for substantiating
business use.
In McKeown v. The Queen, the court allowed only a portion of vehicle expenses
because the taxpayer overstated business kilometres.
In Fletcher v. Canada, CRA successfully denied vehicle interest deductions due to
incomplete documentation, and the court reaffirmed the need for detailed receipts.
These decisions demonstrate that CRA and the courts require precise evidence of
business use—not estimates, assumptions, or reconstructed logs.
Why CRA Targets This Issue
Vehicle expenses are among the most abused deductions for self-employed individuals.
CRA audits this area extensively because taxpayers often:
• claim unrealistic business-use percentages (like 80–100%)
• fail to keep mileage logs
• deduct all fuel receipts without allocation
• claim personal trips as business trips
• deduct full insurance or lease payments
• claim CCA on vehicles used primarily for personal reasons
• deduct ineligible luxury vehicle lease costs
CRA cross-checks vehicle expenses with revenue levels, industry standards, GPS data
(in some investigations), and client activity patterns. This category is a major audit
trigger for Form T2125 filers.
Mackisen Strategy
At Mackisen CPA Montreal, we build audit-proof vehicle deduction systems. Our
structured approach includes:
• determining whether actual expenses or per-km reimbursements apply
• setting up a digital or paper mileage log that meets CRA requirements
• guiding clients on calculating business-use percentages accurately

• reviewing all fuel, repair, insurance, interest, and lease receipts
• applying CRA limits for interest and lease deductibility
• optimizing CCA claims without raising audit risk
• allocating vehicle expenses correctly when multiple vehicles are used
• ensuring accurate GST/HST ITC calculations based on business use
This ensures self-employed individuals maximize deductions while staying fully
compliant with CRA rules.
Real Client Experience
A rideshare driver claimed 90% business use without logs. CRA reassessed the claim.
We rebuilt the log using trip data, fuel receipts, and GPS history, reducing the
reassessment significantly.
Another contractor used the per-km method incorrectly on their T2125. CRA denied the
entire deduction. We corrected the return and implemented the actual-expense method
with logs.
A graphic designer claimed full insurance and lease payments. CRA denied the
personal-use portion. We implemented a 3-month sample log and increased allowable
deductions safely in subsequent years.
Common Questions
Self-employed individuals often ask whether estimates are allowed. No—a log is
required.
Others ask whether a mileage app is acceptable. Yes—CRA accepts digital logs.
Some ask whether they can claim fuel without logs. No—the business-use portion must
be supported.
Another question: Is buying better than leasing? It depends—each has different tax
consequences.
Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps
self-employed Canadians claim vehicle expenses accurately and safely. Whether you
drive for clients daily or only occasionally for business, our expert team ensures
precision, full CRA compliance, and maximum tax efficiency.