Many business owners use their cars for business and personally incur expenses in doing so. If this applies to you, you’ll want to be able to deduct automobile expenses against the related income. The CRA has strict rules for claiming automobile deductions that are designed to ensure that only true business-related expenses may be claimed. To substantiate your deduction, you’ll have to maintain detailed records of the expenses you incur and the kilometres you drive on income-earning activities.
The 3 scenario required for record keeping
Almost everyone who uses an automobile for business should be keeping records of some kind to substantiate their business tax deductions.
If your circumstances match any of the following scenario, you should be maintaining records for vehicle use.
1. You own a business and use your own car for business
As a sole proprietor, you may claim car expenses related to your business. However, you must be able to show that the expenses were incurred for the purpose of earning business income and were reasonable in the circumstances. Because your car has both personal and business use, you must keep tax records of all expenses incurred and the kilometres driven on business-related activities as well as total kilometres driven.
If your business is incorporated, you are likely an employee of your corporation. In that case, your situation falls under scenario 2 below. If the car is owned by your company, refer to scenario 3.
Note that if a car is clearly a business asset and is used 100% for business purposes, then there is no need to keep separate kilometre and expense records. The expenses would be treated like normal business costs, and would be fully deductible.
For example, a car owned by your business is used throughout the day by you or your employees to visit clients or run errands for the business, and is left on the premises at night.
2. You are an employee and uses your own car for employment duties
In order to deduct automobile expenses, you must meet the following conditions:
- You must be ordinarily required to work away different places;
- You must be required to pay automobile expenses incurred in the course of performing your employment duties;
- You must not have received a tax-free car allowance; and
- You must have CRA Form T2200 signed by your employer and you should keep it on file in case the CRA requests it.
The requirements needed to be able to deduct employment expenses are the same for a business owner who is also an employee of the business.
However, given that the owner-employee does not deal at arm’s length with the company, the CRA is likely to look more closely at these expenses. Specifically, an employee who is also the business owner must satisfy two key conditions before deducting employment expenses:
- The expenses must have been incurred as part of the employment duties, and not as a shareholder of the business.
- You must have been required to pay for the expenses yourself as part of your employment duties.
Where both requirements have been met, you may, as the owner of the business, have the authority to certify Form T2200 for yourself to support a deduction of these expenses on your tax return.
You may be receiving an allowance from your employer to compensate you for the use of your car. If the allowance is a reasonable reimbursement of your actual expenses, you can treat it as a non-taxable amount, and not deduct any automobile expenses. However, if the allowance is unreasonably low, you can include it in your income and deduct your actual expenses, if you meet the conditions above. You would then have to keep detailed records of expenses and kilometres driven.
It is considered a reasonable allowance if it does not exceed the following rates:
- 59¢/km for the first 5,000 km of business travel; and
- 53¢/km for business travel over 5,000 km.
Also, note that any allowance not calculated wholly per kilometre basis is automatically considered taxable. This would be the case if you received a flat dollar amount per month.
3. You are an employee and uses a company car
In this case, your employer has incurred the cost of the car (either purchase or lease), and so you would not have these expenses to deduct. However, because the car is available to you for your personal use, you are considered to have received a taxable benefit from employment, which can be a significant amount. If you drive the employer’s car only during business hours, the automobile is not considered available to you for personal use and there is no benefit.
As you can see, most people who use their cars for work or business must do at least some record keeping. In all cases, you should maintain separate records for each automobile used.
Automobile deductions are calculated for each vehicle separately.
Most of the discussion in the remainder of this article deals primarily with the first two scenario. For information on employees who use company cars, see the section titled “Taxable benefit”.
New incentives to encourage the purchase of an electric car (or zero-emission vehicles) were introduced by the federal government. There are two distinct incentives 1) a cash-back incentive applicable at the time of purchase, or 2) qualification for fast write-off tax depreciation (CCA). If you take advantage of the cash incentive, then the fast write-off tax depreciation incentive will not apply.
A zero-emission vehicle is a new vehicle that is fully electric, fully powered by hydrogen, fully powered by a combination of electricity and hydrogen, or plug-in hybrids with a battery capacity of at least 7 kWh.
What expenses do you need to track?
Once you’ve determined that you should be keeping records, you’ll want to ensure that you’re tracking everything that is deductible. When using your car for business, you normally incur two types of expenses – fixed costs and operating expenses.
Operating expenses include gasoline, maintenance, oil changes and repairs, car washes, insurance, licence, registration fees and expenses related to operating
a zero-emission vehicle, such as charging fees. Make sure you track all these amounts in your log.
Fixed costs are amounts that relate to the vehicle itself and do not vary with kilometres driven. They include tax depreciation (CCA), interest expense for purchased vehicles, and lease payments for leased vehicles. Each of these items is subject to special rules that limit the portion of the actual cost that can be included in your total expenses.
Tax Depreciation (CCA)
If you have purchased a passenger vehicle that cost up to $30,000 (before sales tax) is added to a pool of costs and each year you are entitled to claim up to 30% of the pool’s balance as tax depreciation (only 15% in the year of purchase). Any amount claimed in one year reduces the pool balance for the next year’s calculation.
In 2018, the federal government announced the Accelerated Investment Incentive (AII) that accelerates the amount of tax depreciation that can be deducted for the year in which qualifying depreciable property is acquired. If you purchased a new car after 2018, it would be considered.
If you borrow to buy your car, you can include the interest on the loan in your total car expenses.
The amount you may include is limited to $300 per month. This restriction applies to both passenger vehicles, and zero-emission passenger vehicles.
If you lease the car you use for business, the lease payments also form part of your total expenses. However, there are limits here as well. The formula for determining the limits restricts you to deduct only the portion of the lease payments that relates to the first $30,000 (plus GST/HST and PST) of the cost of the car. Note that this restriction only applies to passenger vehicles, and not to zero-emission passenger vehicles.
At the end of the year, your total expenses must be allocated business and personal on some reasonable basis with only the business portion being deductible. The allocation is usually done based on distance travelled. That is, the proportion of total expenses that is deductible is determined by dividing the number of kilometres driven for business purposes by the total kilometres driven.
(Business Km / Total Km) X Total Expenses = Deductible Expenses
Therefore, it is essential that you keep records of all work or business trips you make. Note that driving from home to your regular place of work is considered to be personal not business travel.
There are some expenses that do not have to be pro-rated. Parking charges incurred while on business trips are fully deductible, as are car repairs resulting from accidents that occurred while the car was being used for business. Using the same rationale, parking expenses and accident repairs resulting from personal travel are not deductible.
Logging your km driven
It is acceptable to use a simplified method of logging business and personal use of vehicles, rather than maintaining a complete logbook each year. To be able to take advantage of this method, businesses must maintain a logbook covering a full 12-month base period that is typical for the business. After one complete 12-month period of keeping a log and establishing a base year, a three month sample logbook can be used to extrapolate business use for the entire year, provided the usage in the sample period is within the same range (within 10%) of the results of the base year. The business use of the vehicle in the subsequent year will be calculated by multiplying the business use as determined in the base year by the ratio of the sample period and base year period.
(Sample year period % / Base year period %) X base year % = calculated annual business use %
It should be further noted that this method will only provide relief from the documentation requirements where there is no significant change in the business use of vehicles from year to year.
You should note that keeping a kilometre log is an important part of tracking your automobile expenses, since the percentage of business use will determine how much of your total expenses you can deduct.
Generally, the CRA requires that you record your automobile’s odometer reading at the beginning and end of each year or period, in order to determine total kilometres driven. As well, your log should include the details of each trip taken for work or business by date, destination, purpose and number of kilometres.
Personal vs. business
At times, it can be difficult to determine whether a particular trip is business or personal. You should note that driving from your home to your place of work is personal travel. On the other hand, the following trips are considered business travel:
- A trip from your home to a client’s place of business and back home,
- A trip from your home to a client’s place of business and then to your regular place of work, and
- A trip from your regular place of work to a client’s place of business and then home.
Based on the above, it would appear that you could maximize your business travel by scheduling business appointments on the way to and from work.
Most of the recordkeeping requirements discussed apply to people who use their own vehicle for business. However, even if your employer provides you with a car for carrying out your duties, you may still be required to track kilometres driven to calculate your automobile benefit. The benefit will be based on the purchase price or lease cost of the car (which will be tracked by your employer), as well as the business and personal kilometres driven (which should be tracked by you).
The availability of the car is considered a taxable benefit to you, and a standby charge will be included in your income. If your employer owns the car, the standby charge is 2% per month of the car’s original costs. If the car is leased, it is 2/3 of your employer’s monthly lease costs. In either case, the taxable benefit is calculated on a daily basis for each day that the car is made available to you, regardless of whether or not you use it for personal purposes. As noted earlier, a car driven only during business hours and left at the employer’s place of business during non-business hours is not available for your personal use and consequently, there is no benefit.
Your employer must report this automobile benefit on your T4 at year-end and withhold taxes against the benefit throughout the year, just as if it was part of your salary.
If your total personal driving is less than 20,004 kilometres per year and represents less than 50% of total use, you may qualify for a reduction of the standby charge. If the reduction applies, you would include in income only a fraction of the normal standby charge that your personal distance travelled is of 20,004 kilometres (assuming the automobile is available for a full year). However, you will have to track kilometres driven to support the reduction.
If you are just over 50% in personal kilometres, then it is likely worthwhile for you to try to reduce personal driving below this limit before year-end. In addition, you can reduce the overall standby charge by surrendering control over the automobile to your employer during periods when you will not be using it, such as vacations. However, this may not always be practical.
If you are well over the 50% limit, then you will be subject to the full standby charge and there will be no need to track kilometres driven to support a reduction. However, you will still have to do so if your employer pays operating expenses (both business and personal) or reimburse you for these expenses.
Operating expense benefit
The payment of personal operating expenses by your employer is also a taxable benefit. The amount of this benefit is calculated as:
(Number of personal kilometres x 28¢) – Amounts reimbursed by employee
Note that this amount may bear no relationship to actual operating expenses paid by the employer. Any reimbursements must be made within 45 days of the year-end in order to reduce the benefit. If all personal operating expenses are reimbursed to the employer within the period, then the per kilometre amount will not apply.
If business driving is more than 50% of the total, you have the option of basing your operating cost benefit on 1/2 of the standby charge. You must notify your employer before the end of the taxation year if you wish to use this method.
Registrant employers need to be aware that taxable benefits related to the use of an automobile are deemed to have a GST/HST component. A registered employer is considered to have collected sales taxes applicable on these taxable benefits at the end of February in the following year in which they provided the benefit to the employee. This corresponds with the deadline for calculating employee taxable benefits for income tax purposes and for issuing T4 slips.
If you are an employer who is a GST/HST registrant, the sales taxes that you must remit back to the government authorities relating to the standby charge are calculated as follows:
Standby charge benefit before reimbursements X Applicable GST/HST rate
As an employer, you are considered to have collected sales taxes depending on the rate applicable to the province where your employees ordinarily report for work. And you will need to remittances of GST/HST on taxable benefits.
If you track all car expenses and kilometre driven noted above throughout the year, you’ll have the information you need to determine your tax deduction when the time comes to prepare your tax return. And remember to keep receipts and other documentation to back up your claims. Although you’re not required to file receipts with your return, the CRA may ask you to produce them at a later date.