If your business has not received a letter from the CRA reviewing your Corporation’s automobile expenses, one may be coming soon. Hot on the heels of this summer’s Truck and SUV project, CRA has begun its vehicle expense project.
What are the consequences?
The goal of the vehicle expense project is to deny non-allowable automobile expenses, including leases, operating expenses, tax deprecation, and attribute taxable benefits to the employees or shareholders of a corporation, or both. Taxable benefits are especially costly as they are taxable to the individual at their marginal tax rates, currently up to 54% (2019).
We will briefly review some of the limitations and permitted automobile deductions, particularly for corporate-owned automobiles.
No, you cannot just “write off your car for business”
“Nice car, how did you afford that?”
“It’s a write-off; I use it for business”
Business owners often get bad tax advice from their friends…or other business owners. No, you can’t always write off your entire car lease and not the down payment either. And no, your business can’t buy that high-end vehicle for you and pay all the expenses, not even if you have another car at home or if you put the company logo on it.
The sky is not the limit
There are three general expense restrictions for passenger vehicles: Leasing costs are limited to $800/month, capital cost allowance (tax depreciation) is limited to the first $30,000, and $300/month is the limit on loan interest. Furthermore, as the price of your vehicle goes up, the amount of your deductible leasing expenses decreases, potentially making the actual deduction on a higher-end vehicle relatedly small.
Taking the company car home will cost you, a lot!
Employees or shareholders that have a company-owned vehicle available for personal use are subject to two taxable benefits: A monthly standby charge of 2% of the cost of the vehicle or two-thirds of the monthly lease, as well as an operating benefit of $0.28 per personal use per KM. The taxable benefit is reduced if the vehicle is used more than 50% for business, but of course, you must prove that with a log.
It goes without saying that expenses for personal vehicles are not permitted.
A way out?
The tax act allows a reasonable mileage-based allowance for the use of an automobile, currently $0.58 for the first 5000 KM and $0.52 after that (2019). So, a business owner or employee driving 20,000 KM for business annually would be entitled to receive $10,700 tax-free upon proof of mileage driven. No log means little or no deduction, and maybe even a taxable benefit to boot.
Dos and Don’ts
- Do keep a driving log -there are Apps available to make it easy;
- Do reimburse yourself with reasonable per-kilometer allowances – they are tax-free;
- Be wary of using company vehicles for personal use – it will cost you;
- Don’t ignore the rules – it’s the law and CRA is stepping up enforcement.
Documentation, especially logbook records are key to getting the maximum deductions for automobile expenses. Smartphone Apps make it easy to keep records of you driving but record-keeping habits are much harder to change, as are perceptions of what is deductible or not. The CRA vehicle expense project will force business owners to step into line with the rules and the onerous task of record-keeping – or pay higher taxes and penalties and interest on non-compliance.
If you get a post-assessment review notice from the CRA, speak to your Sloan Partners tax specialist to defend your position with CRA, maximize your allowable deductions, provide you with alternative solutions, and navigate the complicated world of income tax compliance.
Disclaimer: This article is intended for educational and informational purposes only. It is not intended in any way whatsoever to provide tax advice. The reader should be aware that legislation and administrative policy are subject to change at any time. None of the persons involved in the preparation of this article accepts any responsibility for its contents or the consequences that arise from its use.