Vehicle expenses and home-office expenses are among the most commonly claimed deductions for self-employed Canadians and many employees — and among the most commonly disallowed. The reason is almost never that the deduction is improper. It is that the taxpayer estimated the amount instead of measuring it, and could not prove the figure when the Canada Revenue Agency (CRA) asked. This guide shows how to claim both correctly so the deduction holds.
Vehicle expenses: the log is everything
Almost every small business and sole proprietor uses a vehicle for both business and personal driving. That is perfectly fine. What auditors look for is whether you can distinguish the two. Many businesses simply pick a percentage — 50%, or 20% — out of the air. You know it is a guess, and so does the auditor, which makes vehicle expenses easy to challenge and easy to reassess.
The fix is a vehicle log. It is simple to keep. Throughout the year, record each business trip: where you went, the reason, and the starting and ending odometer readings. Take an odometer reading at the start and end of the year as well. At year-end you divide total business kilometres by total kilometres driven to get your business-use percentage, and you claim that percentage of your vehicle costs — fuel, insurance, licensing, interest on a vehicle loan, leasing costs, and maintenance.
A worked example: if the odometer goes from 5,000 km to 7,500 km in a month (2,500 km total) and 1,000 of those were business trips, business use is 1,000 ÷ 2,500 = 40%, so 40% of the vehicle's expenses are deductible that period. Apply the same arithmetic across the year.
If you operate through a corporation, you can have the corporation reimburse you for its share of the actual vehicle costs. A reimbursement that reflects actual cost is not taxable to you, and the reimbursement becomes a deductible expense of the corporation.
Home office: measure the space
Home-office expenses are a perennial audit favourite because they are so often arbitrary and over-claimed. The rule is straightforward: you can claim a share of your home's carrying costs equal to the share of the home used for business. If your home is 1,000 square feet and your office is a 110-square-foot room, you can claim 11%.
What you can claim depends on whether you rent or own. A renter can claim that percentage of rent, heat, and power. An owner can claim that percentage of mortgage interest, property tax, heat, and power. (For employees claiming a home office, the deductible categories are narrower — heat, power, and insurance — and the work-space conditions in subsection 8(13) of the Income Tax Act must be met.)
What you should not do is stretch the claim. Including a share of gardening or swimming-pool maintenance, or inflating the office's square footage, is exactly what auditors look for. The book recounts a client who claimed an entire basement — half the house — when its only business use was storing a dozen boxes of old files, and another who tried to claim the kitchen and living room because clients were occasionally entertained there. Auditors see through it, and absent support they deny it.
Document the office before you need to
People move. When an auditor reviews a prior year and asks what percentage of a former home was used for business, many taxpayers cannot prove it because the home is gone. So document the office now, whether or not you plan to move: take photographs, draw a floor plan, calculate the square footage, photograph that too, and email it all to yourself so it is timestamped. You hope never to need it — but if you are audited, it is the difference between a defended claim and a denied one.
Employees: you need a T2200
Employees can claim employment expenses only if their employer completes Form T2200, the Declaration of Conditions of Employment. The form sets out which expenses you were required to pay and whether you were reimbursed. Once signed, it lets you deduct qualifying expenses — which can include a home office, vehicle costs, supplies used directly in your work, a cell phone, internet, and the cost of an assistant — net of any reimbursement or allowance.
That last point is important. The T2200 also records reimbursements and allowances, and you must subtract those from your expenses. A reasonable per-kilometre vehicle allowance is generally not taxable; an allowance above the reasonable rate becomes taxable income, though you can then deduct your actual expenses. Run the numbers either way and claim the result that is correct for your facts.
Why these two matter so much on audit
Large vehicle expenses and large home-office expenses both appear on the CRA's list of audit risk factors. The agency knows these figures are frequently estimated, which is why a return showing big numbers in either category — especially out of line with others in your industry — raises the odds of a closer look. The defence is the same in both cases and it is entirely within your control: keep the log, measure the space, and hold the supporting documents. A measured, well-documented claim is a claim that survives.
Related reading
For the broader framework on what businesses can deduct and how long to keep records, see our guide to deducting business expenses the right way, and for how to handle the audit itself, see surviving a CRA audit.
This guide draws on Dale Barrett's book Pay WAY Less Tax!, a plain-language collection of tax-saving tips and strategies for Canadians. The book is general information, not legal advice; the rules change often, so confirm the current treatment for your own situation before acting.