Vehicle Purchase Journal Entry: Loan, Down Payment, Trade-In

How do I record a new vehicle bought with a down payment and a loan?

Record the vehicle at its full cost on the day you buy it, put the down payment against the bank account, and record the rest as a loan. The loan is a liability, not an expense. Journal entries are bookkeeping practice, not set by law; the tax rules are cited in each section.

The cost is the price plus the GST/HST and PST you paid, less any GST/HST input tax credit you claim (CRA Guide T4002, chapter 4). Whether and when a credit reduces the cost depends on the vehicle and your use; see buying a car through your business and recording GST/HST.

If you paid the down payment or the first payments from a personal account, credit owner's equity (sole proprietor) or the shareholder loan account (corporation) instead of Bank; see the shareholder loan account and business expenses paid personally.

A vehicle is a capital outlay, not an expense: the Act denies a deduction for a capital outlay unless it expressly permits one (Income Tax Act, paragraph 18(1)(b)). The permitted route is capital cost allowance (CCA), a yearly deduction over several years (CRA: claiming CCA). For classes, rates and the first-year claim, see capital cost allowance.

A case is not simple when the vehicle or the loan is in your name but the corporation pays, a personal car is moving into the business, there is a trade-in or a lease buyout, the price is above the cost ceiling, or the vehicle is also driven personally. A lease buyout is bought like any vehicle, at the buyout price plus tax, but the earlier lease payments and the lease contract can change the tax result; this page does not cover leases. Gather the purchase agreement, the loan agreement and payment schedule, the trade-in credit shown on the invoice, the odometer reading on the purchase date and, for a personal car, its value on the day business use began.

How do I record a used vehicle purchase?

Record a used vehicle the same way as a new one: debit Vehicle for the price plus the sales tax you could not recover, credit Bank for the down payment and the vehicle loan for the rest. The cost ceiling applies to a used vehicle as it does to a new one (Income Tax Regulations, subsection 7307(1)). The papers to keep are listed in the last section.

Which part of each loan payment is an expense?

Only the interest is an expense. The principal repays money you borrowed for a capital asset, so it reduces the loan and is never deducted. Take the split from the lender's payment schedule or statement, not from an estimate.

The CRA allows interest on money borrowed to buy a vehicle used to earn income. A sole proprietor deducts only the business share when the vehicle is also used personally, and the passenger-vehicle cap applies to a corporation too; for a corporation-owned vehicle, the deduction and any employee or shareholder benefit are decided together, as in the mixed-use section (CRA Guide T4002, chapter 3; Income Tax Act, paragraph 20(1)(c)).

Is there a cap on the interest I can deduct, and on the cost I can claim CCA on?

Yes, for a passenger vehicle. One cap limits the interest and another limits the cost used for CCA. Both limit the tax claim only: the books still show the full cost and all the interest, so keep a note of the excess to reconcile to the return.

The interest cap is a daily share of the amount: the Act allows the lesser of the interest actually paid and a prescribed amount per 30 days, multiplied by the days of interest (Income Tax Act, section 67.2; Income Tax Regulations, subsection 7307(2)). The prescribed amount depends on the year the vehicle was acquired (Income Tax Regulations, subsection 7307(2)). The cost ceiling also follows the year of acquisition, so a vehicle bought in an earlier year keeps that year's ceiling, set out in subsection 7307(1). Zero-emission vehicles have a separate ceiling and CCA rate; see writing off an electric vehicle.

A vehicle that costs more than the ceiling goes in its own class, Class 10.1, and its CCA is figured on the ceiling plus the sales taxes (CRA Guide T4002, chapter 4; Income Tax Regulations, subsection 7307(1)). Finance announced a higher ceiling for vehicles acquired on or after January 1, 2026, but the Income Tax Regulations still show the lower figure and the announcement cites no amending legislation. Which figure applies to a vehicle bought this year is unsettled until the regulation changes; have it confirmed before the return is prepared.

Most cars and SUVs are passenger vehicles. A pickup or van can fall outside the limits, depending on its seating and on how much it carries goods or equipment; see the CRA's vehicle chart (CRA: motor vehicle expenses). Keep a record of the vehicle's seating and what it carries.

How do I record a trade-in of my old vehicle?

Record the new vehicle at its full price, and treat the trade-in credit as what you received for the old one. The credit is part of what you paid for the new vehicle; it is not a discount on its cost. The part of the new vehicle's cost attributed to the trade-in cannot exceed the old vehicle's fair market value (Income Tax Act, subsection 13(33)), so if the allowance looks high, have the numbers reviewed.

The tables leave out GST/HST. If you must charge tax on the old vehicle, the dealer treats the trade-in as a separate purchase: tax is charged on the new vehicle's full price and you charge tax on the trade-in value. If you do not, tax is charged on the price net of the credit. The invoice usually nets these amounts (CRA: GST/HST special cases; see recording GST/HST).

The old vehicle comes off the books at its cost and accumulated amortization. The difference between the trade-in credit and what it was carried at is a gain or loss in the books. Take the credit from the dealer's invoice; if the invoice folds it into a lower price, ask the dealer for the breakdown. If the old vehicle still has a loan, the dealer's payoff appears on the invoice and is booked against the old loan, not as a cost of the new vehicle; the amount financed then includes it.

On the return, the credit is the proceeds from disposing of the old vehicle. The CRA asks you to keep the date and the amount of the payment or credit from each sale or trade (CRA Guide T4002, chapter 1). If the old vehicle was used partly for personal driving, the business share of the credit goes into the CCA schedule under the regular method; under the CRA's administrative method, which suits business use that changes from year to year, the full credit goes in and an adjustment keeps later CCA tied to business use. Follow the method already used for that vehicle (Income Tax Act, paragraph 13(7)(c); CRA Guide T4002, chapter 4). Whether there is a recapture or a terminal loss comes from the CCA schedule, not from the gain or loss in the books; see selling a business asset.

Can I add my personal car to my business, and what cost do I record?

A personal car brought into the business is a capital outlay, not an expense. Its starting cost for the business is generally the lesser of its fair market value on the day business use began and what you paid plus half of any increase in value. Where the car is worth less than you paid, the original price is not the starting cost. CCA is then claimed on the business share.

For a sole proprietor, starting to use property for business is a change in use. The capital cost is the lesser of the property's fair market value at that time and its cost plus half of any increase in value (Income Tax Act, paragraph 13(7)(b); CRA Guide T4002, chapter 4). The CRA also treats you as having disposed of the car when business use begins, so if it is worth more than you paid, a capital gain may arise (CRA Guide T4002, chapter 4). An election in the return for the year business use begins can avoid that deemed disposal, but the car is then treated as not used for business, so there is no cost to claim CCA on while it applies (Income Tax Act, subsection 45(2)). If the car is worth more than you paid, have the election and the CCA trade-off reviewed before filing. If the car is used partly for personal driving, only the business-use part of that cost is claimed (Income Tax Act, paragraph 13(7)(c)). Keep the evidence of the value and the date business use began. No cash moves, so the entry is a debit to the vehicle and a credit to the owner's equity.

If the personal car still has a loan, the CRA looks at the current use of the borrowed money, not its original use, and requires a link between the money borrowed and that use (CRA Folio S3-F6-C1, paragraph 1.35; Income Tax Act, paragraph 20(1)(c)). Whether interest on a loan taken out for a personal car qualifies once the car earns business income depends on that link, and the business share and the interest cap still apply, so have it reviewed.

A corporation does not start using your car; it has to acquire it, by sale or contribution. A corporation and the person who controls it are treated as not dealing at arm's length (Income Tax Act, section 251). For a passenger vehicle acquired that way, the corporation's capital cost is the least of the fair market value, your cost amount for the car and the cost ceiling. The cost amount is generally what you paid if the car was never used in a business, but its undepreciated capital cost if you have claimed CCA on it (Income Tax Act, paragraph 13(7)(h); section 248, "cost amount"). How the corporation pays you for it (cash, the shareholder loan account or shares) is a second entry; see the shareholder loan account. If the payment includes shares of a taxable Canadian corporation, you and the corporation can jointly elect under section 85 (Form T2057) to set the transfer price. The election is due by the earliest of the filing deadlines of either of you for the year of the transfer, and the passenger-vehicle ceiling still limits the amount (Income Tax Act, section 85; see moving a business into a corporation). The sale also has tax consequences for you and for GST/HST: see buying a car through your business.

The loan is in my name but the business makes the payments: how do I book it?

A sole proprietor books it as an ordinary vehicle loan; a corporation paying a loan in your own name is a shareholder loan or a benefit, not the corporation's loan. Three facts decide it: who owns the vehicle, whose name is on the loan, and who makes the payments. A sole proprietor and the business are one taxpayer; a corporation is a separate one.

Whether payments a corporation makes on your personal loan are a loan to you or a shareholder benefit depends on the substance, such as a written repayment agreement or other convincing evidence, not on the entry (CRA Income Tax Folio S3-F1-C1). A shareholder benefit is an amount the corporation is treated as having given you personally (CRA: shareholder benefits). A real loan has its own deadline: a balance owed to the corporation that is not repaid within one year after the end of the corporation's tax year in which it arose is generally included in your income, unless the repayment is part of a series of loans and repayments (Income Tax Act, subsections 15(2) and 15(2.6)). See personal costs the corporation paid and shareholder loans.

Alternatives such as a kilometre allowance or a reimbursement have their own rules; see buying a car through your business. For payments that need sorting, see the shareholder loan account and business expenses paid personally.

What if the vehicle is used for business and personal driving?

A sole proprietor claims only the business share, which is the business kilometres divided by the total kilometres (CRA: motor vehicle expenses). The share applies to the interest, after the cap, and to the CCA, after the cost ceiling. Keep the books at the whole vehicle and the whole loan, and apply the share when you prepare the return.

If you later stop using the vehicle for the business, you are treated as having sold it at fair market value on that day (Income Tax Act, paragraph 13(7)(a)); see selling a business asset.

The business share comes from a logbook; what it must contain is in the CRA vehicle logbook guide.

A corporation-owned vehicle driven personally by its owner or an employee works differently: the corporation's claim and the taxable benefit are decided together, and this page does not answer that. See buying a car through your business.

How do book depreciation and CCA differ on a vehicle?

Book depreciation, called amortization, spreads the cost over the vehicle's useful life in the financial statements. CCA is the tax deduction, set by the CRA's class and rate. The Act does not allow a deduction for depreciation, only for CCA (Income Tax Act, paragraph 18(1)(b)). A corporation's T2 reconciles the statements' amortization to CCA; see amortization and CCA in corporate books.

Keep a CCA schedule for the vehicle that shows the class, the cost, any proceeds from a sale or trade-in, and the balance at each year end. The schedule drives the tax claim, a recapture or a terminal loss. The books' carrying amount does not.

Which documents do I keep for the purchase and the loan?

Keep the purchase agreement or bill of sale, the loan agreement and its payment schedule, the lender's year-end interest statement, and the invoice showing the trade-in credit and the taxes. Add the odometer reading on the purchase date, which the CRA asks for when you buy, sell or trade a vehicle (CRA: motor vehicle records), and the logbook for each year.

For a personal car moved into the business, keep the evidence of its fair market value and the date business use began. For a corporation, keep any written agreement about who owns the vehicle, who owes the loan and how the owner is paid or repaid.

Keep records and supporting documents for six years from the end of the last tax year they relate to. The CRA says records of long-term acquisitions and disposals of property are kept indefinitely, so keep the purchase papers, the CCA schedule and the sale or trade-in papers, and ask before discarding any of them (CRA: keeping records).

Example

These examples are illustrative; all amounts are Canadian dollars, and GST/HST entries are left out.

A new vehicle with a down payment and a loan

A sole proprietor buys an SUV for C$30,000 including all taxes, pays C$6,000 down and finances C$24,000. The books show a debit to the vehicle of C$30,000, with credits of C$6,000 to the bank and C$24,000 to the loan.

The first payment is C$520: C$120 is interest and C$400 reduces the loan. The cost is under the ceiling and the interest is under the cap, so neither limit applies. Had the SUV cost C$60,000, CCA would still be figured on the ceiling plus tax, and any interest above the monthly limit would stay in the books but not on the return. If 60% of the kilometres are for business, the return claims C$72 of the C$120 interest and takes CCA on 60% of the cost, C$18,000.

A personal car moved into the business

A sole proprietor bought a car for C$28,000 three years ago. It is worth C$15,000 today. The capital cost for the business is C$15,000, the lower of the two, not C$28,000. If half the kilometres are for business, CCA is figured on C$7,500. The entry is a debit to the vehicle of C$15,000 and a credit to owner's equity, with no bank entry.

A corporation trades in a truck

A corporation buys a new work truck for C$40,000: a C$12,000 trade-in credit, C$8,000 cash and a C$20,000 loan. Assume the truck is not a passenger vehicle under the CRA's chart, so the ceiling does not apply. The books show a debit to the new truck of C$40,000, with credits of C$8,000 to the bank and C$20,000 to the loan, and the old truck comes off at its carrying amount.

If the old truck was carried at C$10,000 after amortization, the C$12,000 credit gives a C$2,000 gain in the books. The tax result is different. Assume both trucks are Class 10, the old truck cost more than C$12,000, the corporation keeps the new truck at year end and there are no other pool changes. The CCA schedule adds C$40,000 for the new truck and subtracts the C$12,000 proceeds, so the class balance rises by C$28,000 before CCA, with no recapture or terminal loss. The book gain is reconciled separately on the return.

Different for you?

• The vehicle is in your name but the corporation pays the loan, or your personal car is moving into the corporation: who owns the vehicle for tax, its CCA class and cost, and whether the payments are a shareholder loan, a benefit or a business cost all need settling together; bring the vehicle papers and the loan agreement to bookkeeping help.
• The vehicle or loan is in a spouse's or relative's name, or a family member co-signed: who may claim the vehicle and its interest depends on who owns it and who pays; bring the registration and the loan agreement to bookkeeping help first.
• There is a trade-in or a lease buyout in a corporation: the proceeds and the CCA schedule decide the tax result; bring the dealer's invoice or the buyout statement to bookkeeping help and see capital cost allowance.
• The loan balance, the payments and the bank don't reconcile, or several years of vehicle costs were never recorded: see catching up on overdue books and bookkeeping help.
• You incorporated and the vehicle stayed in your name: see books after incorporating a sole proprietorship.
• The vehicle is electric: see writing off an electric vehicle.
• You need the GST/HST entries for the purchase: see recording GST/HST in your books.
• You sold the vehicle outright: see selling a business asset.
• You drive the vehicle for both business and family and have no logbook: see the CRA vehicle logbook guide.