Car Loan Interest Deduction for the Self-Employed in Canada

If you financed the car you drive for your business, the interest on that loan is a vehicle expense you can deduct. Two limits sit on top of it, and the question people actually search for is how they combine: is it $350 a month, is it $350 a month times your business percentage, or is it your business percentage of the interest, capped at $350?

The answer is the last one, with one refinement the "a month" shorthand hides. The limit is not counted in calendar months. It is counted in days.

This page states the rule the way the Income Tax Act and the CRA state it, shows where it lands on the T2125, and works two years through it with the arithmetic shown.

The rule, from the Act

Section 67.2 of the Income Tax Act covers interest on borrowed money used to acquire a passenger vehicle or a zero-emission passenger vehicle, and interest on an amount payable for the acquisition (dealer or manufacturer financing, where you owe the seller rather than a bank). For that interest it says the amount you may use in computing income is deemed to be the lesser of:

1. the interest actually paid or payable for the period, and
2. A ÷ 30 × B, where A is a prescribed amount and B is the number of days in the period for which the interest was paid or payable.

The prescribed amount is in section 7307(2) of the Income Tax Regulations. It depends on when the vehicle was acquired:

When the vehicle was acquired	Prescribed amount (A)
After 2023	$350 for each 30 days
After 2000 and before 2024	$300 for each 30 days

The Department of Finance's announcement of the 2026 automobile limits confirmed that the interest limit stays at $350 for 2026. So a passenger vehicle bought in 2024, 2025 or 2026 carries the $350 amount.

That is where "$350 a month" comes from. It is a reasonable shorthand and it is not the formula. The formula gives you $350 ÷ 30, which is about $11.67 for each day interest was payable. A 31-day month allows about $361.67. A full 365-day fiscal period allows:

$350 ÷ 30 × 365 = $4,258.33

That is the figure the CRA uses in its own example for a car bought on January 1 and financed for the whole year. It is not $4,200 (which is $350 × 12). Multiplying by twelve understates the cap by $58.33 for a full year, and by more if you compute a part year in calendar months.

Which year's limit applies: the car's, not the loan's

Section 7307(2) keys the prescribed amount on the year the automobile is acquired. The date the loan was signed does not appear in it, and neither does the year you are filing. The T2125's own Chart B says the same thing in its footnote: $350 for passenger vehicles bought after 2023, and $300 for passenger vehicles bought after 2000 and before 2024.

So:

• A car bought in 2023 keeps the $300 amount for as long as you own it, including in 2026.
• A car bought in 2024 takes $350, whatever year you file.
• The regulation draws no line between new and used. It asks only when you acquired the vehicle.

The cap first, then the business-use percentage

The cap and the percentage are two separate steps, and the order is fixed by the form.

On the T2125, Chart B ("Available interest expense for passenger vehicles and zero-emission passenger vehicles") takes the lesser of your total interest for the fiscal period and ($350 ÷ 30) × the number of days interest was payable. The result goes into amount 4 of Chart A as your interest, alongside fuel, insurance, licence and registration, maintenance and repairs. Chart A then adds everything up and multiplies the total by business kilometres over total kilometres. The allowable amount goes on line 9281.

In other words, the cap applies to the whole vehicle's interest, before any of it is split between business and personal driving. Your deduction is your business-use percentage of the capped interest, never the cap itself.

The CRA's worked example on its motor vehicle interest page follows exactly that order. Heather paid $2,200 of interest in her fiscal period, which is under the $4,258 limit, so her available interest is $2,200. It goes into her total vehicle expenses of $7,160, and her deduction is 20,000 business kilometres ÷ 25,000 total × $7,160 = $5,728.

Two consequences follow:

1. The cap is not a floor. If your interest is under the limit, you use your actual interest. Nobody gets to deduct $4,258.33 because that is what the formula allows.
2. The excess is gone. Section 67.2 deems the interest to be the capped amount for the year. The part above the cap is not deductible in that year, and nothing in the section carries it forward.

How to work out the percentage itself (which trips count, which kilometres go on top of the fraction) is covered in calculating your business-use percentage.

Interest only, never principal

A car loan payment is part interest and part principal. Only the interest goes in Chart A.

The principal is repayment of the money that bought the car, and paragraph 18(1)(b) of the Income Tax Act denies any deduction for an outlay or payment on account of capital, except as the Act expressly permits. What the Act permits for a car is capital cost allowance. The car's cost goes into a CCA class and you recover it over the years through CCA, claimed in Area A of the T2125 and on line 9936, at the same business-use percentage. It does not matter whether you paid cash or borrowed every dollar: the CCA is based on what the car cost, and the loan only adds interest. How the classes and the yearly deduction work is in the capital cost allowance guide.

What you need is the year's payments split into interest and principal, which the lender can give you. Adding up twelve payments and entering the total claims principal as interest.

Which vehicles are capped

The limit in section 67.2 applies to passenger vehicles and zero-emission passenger vehicles. Interest on money borrowed to buy a motor vehicle that is not a passenger vehicle is still deductible as a vehicle expense, but section 67.2 does not reach it, so there is no per-day cap. Many pickup trucks and vans fall outside the passenger vehicle definition depending on their seating and how they are used, and the test is specific enough to have its own guide.

If you lease rather than finance, this page does not apply. Lease payments have their own monthly limit and their own chart; see leased vehicle expenses for the self-employed.

Worked example one: a full year, where the cap binds

A sole proprietor with a December 31 year-end bought a passenger vehicle in November 2025 with a loan, and drove it all of the 2026 fiscal period. Because it was acquired after 2023, the prescribed amount is $350.

Inputs for 2026:

Item	Amount
Interest payable for 2026 (from the lender's statement, principal excluded)	$5,100.00
Days in the fiscal period interest was payable	365
Fuel	$3,200.00
Insurance	$2,100.00
Maintenance and repairs	$900.00
Licence and registration	$150.00
Business kilometres	15,000
Total kilometres	20,000

Chart B, the cap:

$350 ÷ 30 × 365 = $4,258.33. The lesser of $5,100.00 and $4,258.33 is $4,258.33.

Chart A, the percentage:

Line	Amount
Fuel	$3,200.00
Interest (from Chart B)	$4,258.33
Insurance	$2,100.00
Licence and registration	$150.00
Maintenance and repairs	$900.00
Total motor vehicle expenses	$10,608.33
Business use: 15,000 ÷ 20,000	75%
Allowable (line 9281)	$7,956.25

Check: the four operating costs total $6,350.00, plus $4,258.33 of interest is $10,608.33, and 75% of that is $7,956.25. Of that deduction, $3,193.75 is interest (75% of $4,258.33) and $4,762.50 is everything else (75% of $6,350.00). Capital cost allowance is left out; it is worked separately in Area A.

What the two common mistakes produce here. Skipping the cap and taking 75% of the full $5,100 gives $3,825.00 of interest. Taking 75% first and then comparing the result to the cap gives the same $3,825.00, because it passes the $4,258.33 test comfortably. Either way the interest is overstated by $631.25, which is 75% of the $841.67 the cap removes. The second mistake is the more durable one because it looks like the rule was applied.

Worked example two: a car bought partway through the year

Same business, different car. The vehicle is bought on July 1, 2026 and the loan starts the same day, so interest is payable for July through December.

Counting the days: July 31, August 31, September 30, October 31, November 30, December 31. That is 184 days.

Step	Amount
Interest payable July 1 to December 31, 2026	$2,600.00
Cap: $350 ÷ 30 × 184	$2,146.67
Available interest (the lesser)	$2,146.67
Business use for the year	60%
Interest portion of the deduction	$1,288.00

$350 × 184 = $64,400, and $64,400 ÷ 30 = $2,146.67. Sixty percent of $2,146.67 is $1,288.00. (In the full return, the $2,146.67 is added to the other Chart A costs and the whole total is multiplied by the percentage; the interest portion is shown on its own here so the cap is visible.)

Counting six months at $350 would have given $2,100.00, which is $46.67 short of the real cap, because four of those six months have 31 days. The formula counts days, so count days.

The limits side by side

For quick reference, the cap on a full fiscal period, from the same formula:

Vehicle acquired	365-day fiscal period	366-day fiscal period (a leap year such as 2028)
After 2023 ($350)	$4,258.33	$4,270.00
After 2000 and before 2024 ($300)	$3,650.00	$3,660.00

These are ceilings on the whole vehicle's interest before the business-use percentage, not deductions.

Owned with someone else

If you own the vehicle jointly with another person, section 67.4 of the Act reduces the $350 (or $300) in proportion to the fair market value of your interest in the vehicle compared with everyone's. The CRA's position on its deductible expenses page is the same rule in plainer words: the total that all the owners deduct cannot be more than one person owning the vehicle could deduct.

What to keep

The interest claim rests on three documents: the loan agreement (which shows the money was used to buy this vehicle), the lender's statement splitting the year's payments into interest and principal, and the purchase record showing the acquisition date, since that date decides whether you use $350 or $300.

The percentage rests on your logbook: business trips with a date, destination, purpose and distance, plus the odometer at the start and end of the fiscal period. What the CRA expects in it, field by field, is in the vehicle logbook requirements. Claimable Drive records drives in the background, you swipe each one business or personal, and it works out the business-use percentage from those swipes.

FAQ

Is the car loan interest limit $350 a month or $350 a year? Neither exactly. For a passenger vehicle bought after 2023 it is $350 for each 30 days that interest was payable, computed by the day. Over a 365-day fiscal period that is $4,258.33. For a vehicle bought after 2000 and before 2024 the amount is $300 for each 30 days, which is $3,650.00 over 365 days.

Do I apply my business-use percentage before or after the cap? After. Chart B caps the vehicle's total interest, the capped figure goes into Chart A with the other costs, and Chart A applies the business-use percentage to the total. Applying the percentage first and then testing against the cap overstates the deduction whenever the interest is above the cap.

Does the 2026 limit apply to a loan I took out in 2026 on a car I bought in 2022? No. Section 7307(2) keys the amount on when the vehicle was acquired. A car bought in 2022 takes $300 for each 30 days, whatever year the loan or the return is.

Can I deduct my whole car payment? No. Only the interest part, capped as above and multiplied by your business-use percentage. The principal is a capital outlay, and the car's cost is recovered through capital cost allowance instead.

Does the cap apply to a pickup truck or a van? Only if it is a passenger vehicle. Interest on a motor vehicle that falls outside the passenger vehicle definition is deductible without the section 67.2 cap, still at the business-use percentage.

Does the cap apply to an electric car? Yes. Section 67.2 names zero-emission passenger vehicles alongside passenger vehicles, and the T2125's Chart B covers both with the same amount.

Where does the interest go on the T2125? Into amount 4 of Chart A through Chart B, and from there into your allowable motor vehicle expenses on line 9281. It does not go on line 8710 with other business interest.

Sources

1. Income Tax Act, section 67.2, the limit on interest for a passenger vehicle or zero-emission passenger vehicle, and the A ÷ 30 × B formula.
2. Income Tax Regulations, section 7307, subsection (2): $350 for an automobile acquired after 2023, $300 for one acquired after 2000 and before 2024.
3. Department of Finance, the 2026 automobile deduction limits, confirming the $350 interest limit for 2026.
4. CRA, Motor vehicle: Interest, Chart B and the worked example ($350 ÷ 30 × 365 days).
5. CRA, Motor vehicle expenses: Deductible expenses, the expenses on line 9281 and the joint ownership rule.
6. CRA Form T2125, Statement of Business or Professional Activities, Chart A and Chart B.
7. Income Tax Act, section 18, paragraph 18(1)(b), no deduction for a payment on account of capital.
8. Income Tax Act, section 67.4, the limit for a jointly owned vehicle.
9. Interpretation Bulletin IT-521R, Motor Vehicle Expenses Claimed by Self-Employed Individuals, archived, paragraph 21 on the interest limit.