Automobile Expenses for 2016 Tax Returns
The CRA is looking at automobile expenses more closely than ever. Before assessment they are asking to see proof by way of receipts. The first check to determine if claims get allowed is the LOG BOOK. No log book no expenses. The purpose of a log book is to record all kilometres travelled and to mark which are business and which are personal. Auto expenses can be claimed by the self employed through a schedule to T2125 or by those who have a T2200 from an employer for use of a personal vehicle to earn employment income or commission. The sticking point is always the ratio of the kilometres driven for business vs. the distance travelled for personal use. It has always been the law that that travel between home and the employee’s place of work is personal use. A person travelling from home directly to clients all day incurs no personal use.
Self employed (assume HST registered)
Capital Cost of Vehicle
The capital cost of a passenger vehicle (includes pick-up trucks) is limited to $30,000. The declining balance is “depreciated” by capital cost allowance (CCA) each year at the rate of 30%. The amount of CCA included as a deduction in form T2125 is determined by the ratio of business vs. personal use.
HST Input Tax Credit (ITC)
The amount of ITC that can be claimed for the purchase of passenger vehicles depends on:
- cost of the item, and
- type of business entity, and
- percentage of use in commercial activities
The maximum capital cost on which an ITC may be claimed for a passenger vehicle is $30,000 (excluding HST) which is the same as limit for CCA. This limit applies to all types of business entities.
a. Corporations (Vehicle Owned by Corporation)
If the passenger vehicle is acquired for use primarily (more than 50%) in the commercial activities of the registrant, the ITC is 100% of the HST paid, subject to the above capital cost limitation. Otherwise, no ITC may be claimed. The ITC is claimed in the GST/HST return for the period in which the acquisition occurred.
b. Partnerships and Individuals
If the passenger vehicle is acquired to be used all or substantially all (90% or more) in the commercial activities of the registrant, the ITC is 100% of the GST/HST paid, subject to the above capital cost limitation. This ITC would be claimed in the GST/HST return for the period in which the acquisition occurred. For amounts above 10% and below 90% the amount of ITC is calculated based on CCA for the year. See your tax advisor.
Use of a personal vehicle by employees for business purposes is a common event – particularly by commissioned salespersons. Auto expenses are detailed on form T777 provided the employer has completed and signed form T2200 and states that use of a personal vehicle is required. This form also details any reimbursement of auto expenses provided to the employee and depending on amount and how the payment was calculated can affect the claim for expenses.
a. Flat Monthly Payment (Included in T4)
An automobile allowance paid as a fixed monthly amount is taxed with regular pay and does not affect a claim for expenses on a tax return.
b. Per Kilometre Reimbursement (a “Reasonable” Amount)
The CRA announces each year what the guidelines are for the maximum amount of “non-taxable” reimbursement of automobile expense claims based on distance. These rates (i.e. 54 cents per kilometre) are determined by the CRA to be enough to adequately cover an employee for gas, maintenance, insurance and depreciation. They suit CRA purposes as the employer is left to be the arbiter of business use on the assumption that an employer (driven by prudent business practices) will not wish to overpay an employee any more than the actual kilometres travelled. The amount is referred to as a “reasonable” rate and means that any reimbursement at a rate above the annual rate is taxable but any rate chosen by the employer below the CRA rate is not necessarily “unreasonable”. Where a distance-based reimbursement is used, CRA generally disallows all vehicle expenses UNLESS you can prove that the rate of reimbursement is NOT reasonable (i.e. 10 cents per kilometre). In these cases, the expenses are included but are reduced by the total amount of reimbursement received for the year and the resulting amount is included based on the ratio.
c. No Reimbursement
There are no reimbursements of expenses in some employment contracts. This is sometimes seen where commission arrangements cover the vehicle use. In these cases, the employee can claim all expenses and the amount included is determined solely by the ratio personal/business. Do you have any questions about automobile expenses and the CRA? You can follow and like us on Facebook as Mount Albert Tax Company or Holland Landing Tax Company, and you can connect with us on LinkedIn. Until next time, Ian