How To Make Car Lease Payments Tax Deductible

Who can deduct car lease payments

Whether you're self-employed or an employee leasing a car to earn income, you can write off a portion of your lease payments when you file your taxes with the Canada Revenue Agency (CRA).

Self-employed

If you use your car for business purposes 75% of the time, and for personal trips 25% of the time, then you’ll only be able to claim 75% of your car lease costs on your income tax return.

Employees

If you’re an employee and you’re earning one of the types of income below, you’re allowed to make tax deductions on your car lease:

Commissions and you meet the criteria outlined for commission employees
Salary and you meet the criteria outlined for salaried employees

Track business driving with ease

Trusted by millions of drivers

Automate your logbook Automate your logbook

Claim your deductions

Reclaim your time

Automatic mileage tracking and CRA-compliant reporting.

Get started for free Get started for free

How to deduct lease payments

When you file your annual tax return to the CRA, you can deduct your auto lease payments. To determine how much of your car lease payments are tax-deductible, both employees and self-employed individuals will need to fill out “Chart C - Eligible leasing cost for passenger vehicles” in Form T2125, Statement of Business or Professional Activities.

How much can you deduct from your car lease

As of January 1, 2024, you can write off up to $1,050 per month in lease payments for new leases. Over 12 months, this will add up to $12,600 before taxes.

Example: Let’s say you are a self-employed individual with an annual car lease payment of $8,000. If you use the car for business 75% of the time, you can deduct up to $6,000 from your company’s taxable income. However, if you use it only for business purposes, you can deduct 100% of the lease payments (up to the maximum amount mentioned above).

How to calculate the eligible leasing costs in Chart C

Example: Denise lives in Toronto, Ontario, and leases a passenger vehicle to help deliver online orders on July 1, 2024, with a fiscal year ending December 31, 2024. The Harmonized Sales Tax (HST) in Ontario is 13%.

Line	Leasing agreement information and calculations	Amount
20	Total lease charges paid for the vehicle in 2024	$5,500
21	Total lease payments deducted for the vehicle before 2023	$0
22	Total number of days the vehicle was leased in 2023 and previous years	183
23	The manufacturer's list price	$35,000
24	Take the amount on line 23 or $42,353, whichever is more: $42,353 + HST $5,505.89 x 85%	$40,680
25	[( $950 + HST $123.50) × line 22: 183] ÷ 30	$6,543
26	Line 25 - line 21: $6,543 - $0	$6,543
27	[($36,000 + HST $4,680) × amount 20: $5,500 ] ÷ amount 24: $40,680	$5,500
28	Eligible leasing cost: Amount 26 or 27, whichever is less.	$5,500

Therefore, the eligible leasing cost for Denise will be $5,500.

The last step is to input your eligible leasing costs on line 27 of Form T777, Statement of Employment Expenses. Then, enter the allowable amount of your employment expenses from the total expenses line of Form T777 on line 22900, as part of your tax return to the CRA.

Tax benefits of leasing vs. buying a car for business

There are tax benefits to leasing a car for business purposes instead of buying your own outright.

When you lease a car, you don’t own it. You can deduct 100% of your lease payments if you use your car solely for business.

If you use it for both personal and business use, you’ll need to claim only the business portion. What’s more, the timing of when you lease the car is important. That’s because the earlier in the year you lease the car, the more months you can claim the tax deductions for.

On the other hand, if you decide to buy a car, you own it. Therefore, you can make deductions through the Capital Cost Allowance (CCA), which is used to depreciate assets.

Also, you can deduct the interest on the vehicle’s car loan. Ultimately, there are benefits to each option, and it will depend on how you plan to use your vehicle.

Thresholds and limits

There’s a limit to how much you can claim on your tax return. Here’s what you need to know based on your situation.

Self-employed

For self-employed, the limit is calculated by your lease payments and how much your car is worth.

If you use the car to earn farming or fishing income, remember that there are limits on how much you can deduct from your lease payments. You will also need to fill out Chart C to determine how much you’re eligible to deduct on your tax return. Another thing to keep in mind is that leases typically include taxes. However, insurance and maintenance are paid separately. You can include the taxes on line 20 of Chart C. Then, insurance and maintenance can be entered in Chart A - “Motor vehicle expenses” in the T2125 form.

Employees

If you leased a passenger vehicle prior to January 1, 2001 as an employee, you will need to refer to the 2008 version of the Guide T4044, Employment Expenses to help you calculate the eligible leasing costs.

Leases typically do not include insurance, maintenance, and taxes. Generally, you pay for these expenses separately. You’ll need to list these expenses on Form T777, Statement of Employment Expenses.

FAQ

What are the deductible lease payments for CRA?

When you lease a passenger vehicle as a business owner or an employee, your lease payments are deductible when you file your taxes with the CRA.

How much of a lease can I write off in Canada?

As of January 1, 2024, you can write off up to $1,050 per month in lease payments. Over 12 months, this will add up to $12,600.

How to approach a lease down payment?

Before you sign a lease agreement, you’ll need to understand how each payment reduces the principal and interest. Ensure you have allocated money in your budget to pay for this new ongoing expense.