Leasing a car for business or work-related purposes can offer significant tax advantages. If you’re self-employed or an employee using a leased vehicle to generate income, here’s everything you need to know about deducting car lease payments and maximizing your tax benefits in Canada.
Table of Contents
Who Can Deduct Car Lease Payments?
1. Self-Employed Individuals
As a self-employed person, you can deduct a percentage of your car lease payments proportional to your business use of the vehicle. For example:
- Business Use Percentage: If you use your car for business 75% of the time and personal use 25% of the time, you can claim 75% of your lease costs.
2. Employees
Employees can deduct lease payments if:
- They earn commission income and meet CRA criteria for commission employees.
- They earn a salary and qualify under the rules for salaried employees.
đź’ˇ Tip: Employees will need Form T2200 (Declaration of Conditions of Employment) signed by their employer to claim vehicle-related expenses.
How to Deduct Car Lease Payments
To claim car lease payments, you must:
- Complete Chart C: Use Chart C – Eligible Leasing Cost for Passenger Vehicles in Form T2125 (Statement of Business or Professional Activities) to calculate your eligible leasing costs.
- Enter Results on Tax Forms:
- Self-employed individuals: Input eligible costs in the appropriate section of Form T2125.
- Employees: Transfer eligible leasing costs to Form T777 (Statement of Employment Expenses) and then to line 22900 of your tax return.
How Much Can You Deduct?
Deduction Limits for 2024 and Beyond
- As of January 1, 2024, you can claim up to $1,050 per month in lease payments, totaling $12,600 annually (before taxes).
Example: Business Use Deduction
- Annual Lease Payment: $8,000
- Business Use Percentage: 75%
- Deductible Amount: $8,000 Ă— 75% = $6,000
💡 Note: If you use the car solely for business, you can deduct 100% of the lease payments, up to the CRA’s maximum limit.
What Expenses Can You Claim on Your Taxes in 2025?
New CRA Tax Brackets for 2025: Changes and Updates
CRA Mileage Rates 2025: Everything You Need to Know for Business Driving and Tax Claims
How to Calculate Eligible Leasing Costs Using Chart C
Let’s consider an example to illustrate the process:
Scenario: Denise leases a vehicle on July 1, 2024, to deliver online orders. Her fiscal year ends on December 31, 2024, and the Harmonized Sales Tax (HST) rate in Ontario is 13%.
| Line | Leasing Agreement Information and Calculations | Amount |
|---|---|---|
| 20 | Total lease charges paid in 2024 | $5,500 |
| 21 | Total lease payments deducted before 2023 | $0 |
| 22 | Total days vehicle leased in 2023 and earlier years | 183 days |
| 23 | Manufacturer’s list price | $35,000 |
| 24 | $42,353 Ă— 85% (CRA threshold + HST) | $40,680 |
| 25 | [(Monthly Limit $1,050 Ă— HST) Ă— 183 days Ă· 30 days] | $6,543 |
| 26 | Line 25 – Line 21 | $6,543 |
| 27 | (Vehicle Cost Ă— Lease Payments Ă· Line 24) | $5,500 |
| 28 | Eligible Leasing Cost: Lesser of Line 26 or Line 27 | $5,500 |
Result: Denise’s eligible leasing cost for 2024 is $5,500.
Leasing vs. Buying: Tax Benefits
Leasing a Vehicle
- Deduct lease payments proportional to business use (up to CRA limits).
- Ideal for those who want predictable monthly costs and don’t need to own the car.
Buying a Vehicle
- Claim depreciation through the Capital Cost Allowance (CCA) for the vehicle.
- Deduct interest on a car loan.
- Best suited for long-term use and ownership.
Key Considerations and Limits
For Self-Employed Individuals
- Limits are based on your lease payments and the vehicle’s value.
- Separate out expenses like insurance and maintenance, which should be entered in Chart A – Motor Vehicle Expenses in Form T2125.
For Employees
- Deduction rules may vary if the vehicle was leased before January 1, 2001. Refer to older versions of CRA guides for specific instructions.
- Insurance, maintenance, and taxes are typically paid separately and must be recorded on Form T777.
Frequently Asked Questions (FAQ)
1. Can I deduct my entire lease payment?
You can only deduct the portion of your lease payment related to business use. The maximum deductible amount is $1,050/month as of 2024.
2. Are taxes included in my deductible lease payments?
Yes, taxes (like HST) can be included on line 20 of Chart C when calculating your eligible leasing costs.
3. Can I claim both lease payments and maintenance expenses?
Yes, you can claim lease payments as well as maintenance, insurance, and fuel costs separately.
4. How do I calculate my business use percentage?
Track your vehicle’s total kilometers and the kilometers driven for business. Divide business kilometers by total kilometers to determine the percentage.
How to Claim Mileage on Taxes in Canada: Maximize Your Tax Deductions
Unique Tax Strategies for 2024: Essential Year End Planning Tips
Claiming Gas and Vehicle Expenses on Taxes in 2025: A Complete Guide for Canadians
Final Thoughts
Leasing a car for business purposes can offer significant tax savings, whether you’re self-employed or an employee. By accurately tracking your business use and completing the required CRA forms, you can reduce your taxable income and optimize your return. Choose the option—leasing or buying—that aligns best with your financial goals and usage needs.
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