Leased Car Deduction for the Self-Employed in Canada

Most people who lease a car for their business know there is a monthly limit on what they can deduct. Fewer know there are two limits, and that on a car with a high sticker price the one that bites can be the second one, not the monthly one. It is a second test, keyed to the car's manufacturer's list price, that shaves the deduction down in proportion to how far the sticker sits above the passenger-vehicle ceiling.

The other common error is the order of operations. The lease limit is applied to the whole lease charge first, and your business-use percentage is applied to what survives. Doing it the other way round can make the limit look as if it does not apply to you when it does.

This page states the rule from the statute, gives the figures by the year the lease was signed, and works one year (and the year after it) through the CRA's own chart.

Where the limit comes from

Section 67.3 of the Income Tax Act says that where you pay lease charges on a passenger vehicle and those charges are deductible, the total you can deduct for the year is deemed not to exceed the lesser of two amounts. It opens with "notwithstanding any other section of this Act", so the cap sits on top of the ordinary rule that business expenses are deductible.

The two amounts are formulas, and section 7307 of the Income Tax Regulations fills in the dollar figures.

1. The monthly limb, paragraph 67.3(c). The prescribed monthly amount, times the number of days from the start of the lease to the end of your fiscal period (or the end of the lease, if sooner), divided by 30. From that you subtract everything you deducted for this lease in earlier years, imputed interest on refundable deposits over $1,000, and reimbursements you became entitled to.
2. The list-price limb, paragraph 67.3(d). Your actual lease charges for the year, times the prescribed passenger-vehicle ceiling, divided by 85% of the greater of the car's manufacturer's list price and a prescribed floor. Then the same two subtractions for deposits and reimbursements, measured for the year alone.

The CRA turns both into Chart C, Eligible leasing cost for passenger vehicles, on Form T2125. If you searched for Chart B: on the T2125, Chart B is the interest limit for a car you bought on credit. Leasing is Chart C.

The prescribed amounts, by the year the lease was signed

Every prescribed amount in the chart is fixed by the year the lease was entered into, not the year you are filing. Subsection 7307(3) keys the monthly amount to "leases entered into" in a given year, and subsection 7307(1) prescribes its ceiling for an automobile "leased under a lease entered into" in a given year. A lease signed in 2024 carries its 2024 figures for its whole term.

Lease entered into	Monthly amount, before tax	Ceiling, before tax	List-price floor, before tax
2026	$1,100	$39,000	$45,882
2025	$1,100	$38,000	$44,706
2024	$1,050	$37,000	$43,529
2023	$950	$36,000	$42,353
2022	$900	$34,000	$40,000
2001 to 2021	$800	$30,000	$35,294

Three things about that table.

Each amount is grossed up for sales tax. The regulation defines each one as the figure plus the GST and PST, or the HST, that would be payable on it. In Ontario, at 13% HST, the monthly amount for a lease signed in 2026 becomes $1,243 ($1,100 plus $143), and the ceiling becomes $44,070 ($39,000 plus $5,070). Your lease charges on the chart include the tax you pay on each instalment, so the comparison is tax-in against tax-in.

The floor is not a separate number. Subsection 7307(4) defines it as 100/85 of the ceiling. For a lease signed in 2026 that is $39,000 × 100 ÷ 85, which is $45,882 to the dollar, plus tax on it. Multiply by the 85% in the formula and you land back on the ceiling, which is the point: at or below the floor, the list-price limb takes nothing away.

The 2026 ceiling comes from the announcement. The Department of Finance announced the $39,000 ceiling for 2026 on January 14, 2026, effective January 1, 2026, and in the same release said deductible leasing costs remain $1,100 a month for leases entered into on or after January 1, 2026. Finance announces each year's amounts in December or January and the regulation is amended to match afterwards; the CRA administers the announced figure for the year it covers. Subsection 7307(1) prescribes a single amount that serves both as the capital cost ceiling for a car you buy and as the ceiling in the leasing formula, which is why the CRA's T2125 moves the leasing figure with the purchase figure (its 2025 edition uses $38,000 and $44,706 for a lease entered into in 2025).

Limit first, business use second

Chart C produces an eligible leasing cost. That figure goes on amount 8 of Chart A, Motor vehicle expenses, beside your fuel, insurance, licence and registration and repairs. Chart A adds them up, and only then multiplies the total by business kilometres over total kilometres.

So the order is fixed by the form, and it matches the statute: 67.3 limits the lease charges themselves, and the business-use proportion is applied to a set of costs that already respects the limit. Working out the business share of your raw payments and then asking whether that share is under $1,100 a month is not the test, and on a car used heavily for business it can easily say no limit applies. The worked example below shows the size of that mistake.

How the percentage itself is built (and what counts in the top of the fraction) is covered in calculating your business-use percentage.

What counts as a lease charge

The T4002 guide says to include in the lease charges on Chart C anything the lease agreement bundles into the payment, such as insurance or maintenance, along with the taxes on the payments. Items you pay separately, outside the lease, go on their own lines of Chart A and are not capped by 67.3.

That has a practical edge. Maintenance bought as part of the lease sits inside the cap; the same maintenance paid to a garage does not. Bundled items take the same haircut as the payment whenever either limb comes out below your actual charges.

The charges for the year are the ones incurred in the year, or the ones paid in the year, depending on the method you regularly use to compute your income. That is the wording of 67.3(d) itself.

Deposits over $1,000 and repayments

The two subtractions in both formulas are easy to skip and they do change the answer.

Imputed interest on refundable deposits. If the total of all refundable amounts you paid under the lease exceeds $1,000, 67.3 subtracts the interest that the excess would have earned at the prescribed rate, for the period it was outstanding. The prescribed rate for this purpose is the one in paragraph 4301(c) of the Regulations, a quarterly rate the CRA publishes on its prescribed interest rates page. Interpretation Bulletin IT-521R explains that a refundable amount includes anything you are entitled to get back from the lessor under the lease, including an amount you lent the lessor to bring the payments down. The first $1,000 is ignored entirely.

The CRA's T4002 guide says imputed interest applies only when all three of these hold: you made one or more deposits for the leased passenger vehicle, one or more of them are refundable, and the deposits total more than $1,000.

Reimbursements. Anything that became receivable by you in respect of the lease is subtracted too. In the monthly limb it is everything receivable before the end of the year, cumulatively; in the list-price limb it is what became receivable during the year.

Chart C has no line for either. The T4002 guide says plainly that if you have a repayment owing to you or imputed interest, you will not be able to use the chart, and points you to IT-521R. In practice that means working the two statutory formulas yourself, with the subtraction in each, and entering the lesser result on amount 8 of Chart A.

Worked example: a 2026 lease on a $62,000 car

Priya is a self-employed consultant in Ontario with a December 31 fiscal year-end. She is not registered for GST/HST, so the HST on each payment is part of her cost. On January 1, 2026 she leases a passenger car with a manufacturer's list price of $62,000. The payment is $1,250 a month before tax, $1,412.50 with 13% HST. She paid no refundable deposit and is owed no reimbursements.

In 2026 she makes 12 payments, drives 24,000 kilometres, and 18,000 of them are business.

Chart C, 2026

Amount	What it asks	Priya
20	Lease charges incurred in the fiscal period	12 × $1,412.50 = $16,950.00
21	Lease payments deducted in earlier fiscal periods	$0.00
22	Days leased in this and earlier fiscal periods	365
23	Manufacturer's list price	$62,000.00
24	Greater of amount 23 and ($45,882 + $5,964.66 HST = $51,846.66) for 2026, × 85%	$62,000 × 85% = $52,700.00
25	($1,100 + $143 HST) × amount 22 ÷ 30, for a 2026 lease	$1,243 × 365 ÷ 30 = $15,123.17
26	Amount 25 minus amount 21	$15,123.17
27	($39,000 + $5,070 HST) × amount 20 ÷ amount 24, for a 2026 lease	$44,070 × $16,950 ÷ $52,700 = $14,174.32
28	Eligible leasing cost: lesser of amount 26 and amount 27	$14,174.32

Priya pays $1,250 a month, which is over the $1,100 monthly amount for a 2026 lease, so you might expect the monthly limb to be what bites. It is not. The list-price limb is lower, because her car lists at $62,000 against a 2026 floor of $51,846.66 with tax, and the formula keeps only $44,070 ÷ $52,700 of her charges, about 83.6%.

Notice also that the monthly limb is computed per 30 days, not per calendar month. A full 365-day year gives 365 ÷ 30 = 12.17 times the monthly amount, not 12.

Chart A, 2026

Cost	Amount
Fuel and oil	$3,200.00
Insurance	$2,400.00
Licence and registration	$150.00
Maintenance and repairs	$300.00
Leasing (amount 28 of Chart C)	$14,174.32
Total motor vehicle expenses	$20,224.32
Business use: 18,000 ÷ 24,000	75%
Deductible on line 9281	$20,224.32 × 75% = $15,168.24

Now the wrong order. If Priya took 75% of her $16,950 in lease charges first, she would get $12,712.50, see that it is below both $14,174.32 and $15,123.17, and conclude the limit does not affect her. Her claim would be ($16,950.00 + $6,050.00) × 75% = $17,250.00. That is $2,081.76 more than the statute allows, which is exactly 75% of the $2,775.68 that Chart C removed.

The same lease in 2027

The monthly limb is cumulative over the life of the lease, and the list-price limb is not. Suppose everything repeats in 2027: 12 payments of $1,412.50, so $16,950.00 of lease charges for the year.

Amount	2027
20	$16,950.00
21	$14,174.32 (what she deducted for 2026)
22	730
25	$1,243 × 730 ÷ 30 = $30,246.33
26	$30,246.33 − $14,174.32 = $16,072.01
27	$44,070 × $16,950 ÷ $52,700 = $14,174.32
28	$14,174.32

The room she did not use in 2026 carried forward inside amount 26, which rose to $16,072.01. It makes no difference to her, because amount 27 recomputes on each year's charges alone and it is still the lower of the two. A lease on a car that lists at or below the floor is where the carried room matters.

The same payment on a cheaper car

Change one input: the car lists at $48,000 instead of $62,000. That is below the 2026 floor with tax of $51,846.66, so amount 24 becomes $51,846.66 × 85% = $44,069.66, the $44,070 ceiling with tax less the cent lost to rounding the floor to $45,882. The proportion on amount 27 is therefore 1 (IT-521R describes it as a proportion not exceeding one), so amount 27 is Priya's full $16,950 of charges, and the monthly limb decides: her eligible leasing cost for 2026 is $15,123.17.

Which vehicles the limit reaches

Section 67.3 applies to a passenger vehicle, which subsection 248(1) of the Act defines through "automobile": broadly, a motor vehicle designed or adapted primarily to carry people on highways and streets, seating the driver and no more than eight passengers. A leased vehicle that is not an automobile is not a passenger vehicle, and its lease charges are deducted without the 67.3 limit, then prorated by business use like any other running cost. IT-521R, paragraph 9, says the same: the eligible leasing cost of a motor vehicle other than a passenger vehicle is simply what it cost you to lease it in the year.

The exclusions that matter most in practice are vans and pickup trucks that pass a use test in the year you bought or leased them. Whether yours does is its own question, covered in when a pickup truck or van is not a passenger vehicle.

An electric car does not escape. The separate $61,000 ceiling for 2026 applies only to a zero-emission passenger vehicle you own; the T2125 notes that Chart C includes a vehicle that would qualify as a zero-emission passenger vehicle if you owned it, and the T4002 guide says such a leased vehicle is subject to the same leasing restrictions. What else changes for an electric car is in electric vehicles and business use.

Leasing versus buying, in one paragraph

If you buy the same car instead, the limit moves from the payments to the price: capital cost allowance is claimed on a cost capped at $39,000 plus tax for a car bought in 2026 (class 10.1 at 30% declining balance, covered in the CCA guide), and loan interest is capped by Chart B at $350 per 30 days for a car bought after 2023 (see car loan interest). Chart C is built to mirror that ceiling, so an expensive car is capped either way; which route leaves you with more depends on your own payments, rates and how long you keep the car, and the tax treatment alone does not settle it.

Keeping the claim defensible

Everything above rests on the business-use percentage from your log, because it multiplies the whole of Chart A. Claimable Drive, in beta for iPhone, records drives in the background, you swipe each one business or personal, and it works out the business-use percentage from those swipes and keeps the start and end odometer readings. Keep the lease agreement too: the manufacturer's list price, the start date and any deposit terms are all inputs to Chart C.

If you were expecting to claim a rate per kilometre instead, that is not available to a sole proprietor on a leased car or any other; the reason is in the CRA mileage rate for 2026 and who can use it.

FAQ

What is the CRA lease limit for 2026? For a lease entered into in 2026, the monthly amount is $1,100 before tax per 30 days, and the list-price test uses a ceiling of $39,000 before tax and a floor of $45,882 before tax. Your eligible leasing cost is the lesser of the two limbs. Both are grossed up for the GST and PST, or HST, of your province.

Does the limit depend on the year I file or the year I signed the lease? The year the lease was entered into. A lease signed in 2024 uses $1,050 and $37,000 for 2024 for every year of its term, including the ones you file in 2026 or later.

Do I apply my business-use percentage before or after the lease limit? After. Chart C limits the whole lease charge, the result goes on amount 8 of Chart A, and Chart A applies business kilometres over total kilometres to the total.

Is the leasing chart on the T2125 Chart B or Chart C? Chart C, Eligible leasing cost for passenger vehicles. Chart B is the interest limit for a passenger vehicle bought with a loan.

My car's list price is under the floor. Is there still a limit? Yes, the monthly limb. At or below the floor, the list-price limb gives back your full lease charges, so the monthly amount times days over 30, less what you deducted in earlier years, is the only cap left.

I share the lease with a partner or spouse. Do we each get the limit? No. The T4002 guide says that if you and another person own or lease a passenger vehicle, the limits still apply, and the total all of you deduct cannot exceed what one person leasing the vehicle could deduct.

I put down a large refundable deposit. What happens? Only the part of your refundable deposits above $1,000 matters. Interest on that excess at the prescribed rate, for the time it was outstanding, is subtracted from both limbs, and Chart C cannot do it for you: the CRA says to work it through IT-521R instead.

Sources

1. Income Tax Act, section 67.3, the two-limb limit on lease charges for a passenger vehicle, including the deposit and reimbursement subtractions.
2. Income Tax Regulations, section 7307, the prescribed monthly amount by lease year (7307(3)), the ceiling (7307(1)) and the list-price floor as 100/85 of the ceiling (7307(4)).
3. Department of Finance Canada, Government Announces the 2026 Automobile Deduction Limits and Expense Benefit Rates for Businesses, January 14, 2026: the $39,000 ceiling and the $1,100 monthly leasing amount for 2026.
4. Income Tax Regulations, section 4301, the prescribed rate of interest used for imputed interest on deposits.
5. Income Tax Act, section 248, the definitions of automobile and passenger vehicle in subsection 248(1).
6. CRA Form T2125, Statement of Business or Professional Activities, Chart A (motor vehicle expenses), Chart B (interest) and Chart C (eligible leasing cost).
7. CRA Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income, leasing costs for a passenger vehicle, what counts as a lease charge, repayments and imputed interest, joint leases, and the passenger vehicle definition.
8. Interpretation Bulletin IT-521R, Motor Vehicle Expenses Claimed by Self-Employed Individuals, archived, paragraphs 9 and 10 on eligible leasing cost and refundable amounts.
9. CRA, Prescribed interest rates, the quarterly rates.