If you use your car in your business, it stands to reason that you would be able to deduct the expense related to its business travel.
There are two ways to accomplish this:
- If the vehicle is owned by the company, all of the expenses will be deducted by the company but the employee who uses the vehicle for personal use will have to report a taxable benefit, called a standby charge.
- If the vehicle is owned personally and used in the business, the employee can charge the company a non-taxable allowance of 50 cents per kilometre for the first 5,000 km and 44 cents per km thereafter. This is a deductible expense for the company and in most cases would include a refundable GST input tax credit.
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It all starts with a logbook.
The Canada Revenue Agency requires one to prove the vehicle’s business and personal mix. It should contain the date, destination, purpose and distance travelled for each trip.
If you’ve always claimed a standard 60 percent of vehicle expenses without evidence to support the claim, you may be subject to a costly reassessment following a CRA audit.
To prevent this risk, it would be prudent to get into the habit of using a logbook. Although it sounds cumbersome, an easily accessible calendar in the car, home or office on which you record your daily business trips may be all you need.
Expenses can be deducted on vehicles that are owned by the company and those owned by employees. Which option generates the most bang for your buck? There are many variables that will affect this decision, namely the cost of the vehicle, the total distance driven annually and the percentage of business use.
- Example 1: A $30,000 vehicle used 60 percent for business with 30,000 total annual kilometres.
In this example, I have calculated a standby charge of $7,191, which must be included in the employee’s T4. The deduction to the company is calculated to equal $8,425, giving a net benefit of $1,234 by having the company own the car.
- Example 2: A $30,000 vehicle used 30 percent for business with 30,000 total annual km.
In this example, which illustrates how a change in one of the variables will change the result, I have calculated a standby charge of $11,988 that must be included in the employee’s T4. The deduction to the company is the same at $8,425, giving a net disadvantage of $3,563 by owning the car corporately instead of personally.
If you received a non-taxable allowance, don’t forget the non-deductible costs you incurred to drive your car.
Let’s revisit the non-taxable allowance alternative, using the first example. If the vehicle was owned by the employee, the company would pay a non-taxable allowance of $8,220 to its employee (5,000 km at 50 cents per km plus 13,000 km at 44 cents per km). While I have replaced the standby charge that would be included on the employee’s T4 with a non-taxable allowance, remember that the employee, not the company, has already paid the non-deductible vehicle expenses of $8,425.
Choosing the most efficient way to deduct vehicle expenses should be done on a case-by-case basis. It’s easy to generalize, but if you look over the numbers and do the math first, the results might surprise you.
Allyn Tastad, certified general accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon, at 306-653-5100. He is also involved in the family farm near Loreburn, Sask.
