Claiming car expenses on vehicles owned by employees and business owners

Driving your car can be a big part of one’s business activities, both for business owners and their employees. Automobile related costs can quickly add up, so it is very important to make sure you claim as many possible tax deductions. The following information can help you achieve substantial tax saving, if implemented properly. 

This article covers the following situations:

  1. An employed individual driving his/her own car for employment purposes.

    car expense deductions

    car expense deductions

  2. Self-employed, unincorporated individuals driving his/her own car for business purposes.

This article does not cover leased vehicles, determining the class of the vehicle and vehicles owned by companies.

 

An employee can claim reimbursement for incurred car expenses in two ways:

  • An employee may be reimbursed using a reasonable per-kilometer allowance for travel related car expenses. Every year the CRA sets up reasonable rates for paying employees that drive for work. It means that any claimed expenses that exceeded the reasonable rate will bear tax implications, otherwise they are non-taxable for employees.
  • If an employee was not reimbursed, or received fixed monthly allowances, then they are allowed to claim a percentage of their total car expenses as a proportion of employment related kilometers driven/total kilometers driven.

For example, if an employee drove total 100,000 km in a year, and 40,000km were business or employment related,  he can claim 40% of your TOTAL car related expenses for tax purposes.

If you are paid both non-taxable and fixed monthly allowances, please contact your tax advisor or send me an e-mail to info@TaxGTA.com to determine the tax treatment.

The base for claiming any employment expenses (other than non-taxable tax allowances from point 1.)  is a properly filled and signed form T-2200 – (Declaration of conditions of employment).

Employees should use the form T-777 to summarize the expenses.

The following expenses can be claimed for income tax purposes on prorated basis:

  • Gasoline.
  • Maintenance and general repair.
  • Insurance.
  • License and registration.
  • Capital Cost Allowances (CCA- it is a percentage of capital assets that can be deducted for income tax purposes).
  • Interest expense (lesser of: total interest paid in the year; and $10.00 × the number of days for which interest was paid)
  • Leasing expenses .

It is important to keep careful track of the distances you drive for work purposes to verify your tax claims, in case you are audited by Canada Revenue Agency (previously called Revenue Canada).

It is advised to keep a log book, and/or record all business related driving in your appointment calendar and keep ALL the receipts related to your vehicle.

In 2010, the CRA introduced a simplified method of reporting, under which some taxpayers might only need to track motor vehicle expenses for three months of a year, provided the distance travelled and business use of their vehicle during that quarterly sample period is within 10 per cent compared to a corresponding base year.

It means that during the base year an employee must keep record for the 12 months. The following years only 3 month period may be used for calculation.

You can purchase a log book on AMAZON, or you may also download my template to help you keep track.

The log must show the total number of kilometres driven and total business kilometres for the year. It should also include the date, destination, distance driven and the reason for each trip.

 

There are certain expenses that are fully deductible. These expenses are:

  • Repair that was a result of an accident, if that accident happened, while conducting the business. Obviously, any  vehicle repairs resulted from an accident that occurred during your personal travel ARE NOT DEDUCTIBLE.
  • Additional car insurance required to conduct your business (for example, your standard car insurance cost you $2000 and supplementary business car insurance cost an extra $1000 – your total tax deduction will be 40% * $2,000 plus $1,000 = $1,800)
  • Business parking fees.

Travel between work and home is normally considered for personal use. However, there are possibilities to make it deductible through a proper employment agreement.  Please contact  your tax advisor or send me an e-mail to info@TaxGTA.com for more details.

Employees claiming expenses on their tax returns may be entitled to claim a refund for the business use portion of the HST paid. The HST rebate must then be reported as income in the year it is received. To claim a refund, complete form GST 370 (Employee and Partner GST/HST Rebate Application). Any GST/HST rebate received should be declared as an income in the following year.

 

The rules for self-employed individuals are similar to employees.

A self-employed person using his own vehicle is allowed to claim car related expenses as a proportion of employment related kilometers driven / total kilometers driven.

Self-employed use the form T-2125 (Statement of Business or Professional Activities). The car expense schedule is very similar to the schedule discussed above.

Also, the same rules regarding record keeping apply to self-employed individuals as to employees.

If you have a corporation and you own the car you use for business, the rules are more complex, since there are several options available for deducting business-related car expenses incurred by you.

Please contact  your tax advisor or send me an e-mail to info@TaxGTA.com, if you require more information on that matter.

I hope you enjoy the reading.  Join our mailing list to receive the latest updates like this.

 


Leave a Reply

You must be logged in to post a comment.