My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, January 30, 2012

The Taxation of Automobiles

As discussed in my early January blog Mitigating Your Exposure to Five Popular Canada Revenue Agency ("CRA") Audit Target Areas, automobile expenses are often audited by the CRA and are one of the most contentious items in any review or audit. In my opinion, there are two reasons for this: (1) auto expenses are a fairly simple income tax concept and therefore easy to audit even for inexperienced CRA auditors and (2) auto expenses are an easy target because people do not properly document the business usage of their automobile and thus leave themselves at the mercy of an auditor.

Employees


In order to claim automobile expenses as an employee or commission employee, your employer must complete Form T2200-Declaration of Conditions of Employment. You can then claim your automobile expenses on Form T777  less any non-taxable reimbursements or allowances, to the extent your car is used for business purposes, as discussed in greater detail below. 

Self-Employed Individuals


Similar to employees, most self-employed people typically compile 100% of their gas receipts, repairs expenses, insurance premiums, toll highway fees, car washes and lease costs when organizing and gathering their information for personal income tax purposes. This full claim is then reduced, often after discussions with their accountant, by the personal portion of their automobile usage. For example, if your total automobile costs and expenses are $10,000 and you drive your car 75% of the time for business and 25% of the time for personal purposes, you would report $7,500 for your auto expense claim.

Corporations


If your business is incorporated, the automobile expense issue is more complex. A decision must be made as to whether to own or lease the car in the corporation or whether to own or lease the car personally and charge back the corporation for business use. In the case where you pay 100% of the expenses for your personal car in the corporation, your accountant will typically make an entry to reduce the corporate auto expense by your personal usage ($2,500, using the above example) and charge your shareholder loan for your personal use. Alternatively, if you pay 100% of the auto expenses personally, your accountant will book an entry to increase auto expenses for your business use ($7,500 using the example above) and either have the corporation reimburse you for $7,500 or credit your shareholder loan for the $7,500 of business related costs you paid personally.

In order to avoid the standby charge discussed below, my firm typically does not recommend the purchase or lease of an automobile by the corporation, unless the automobile is used almost exclusively for business and can be documented as such.To be clear, I am not talking about a van, truck, etc. that is used 100% for business purposes, but a car that you drive essentially all the time, both personally and corporately.

Employer Owned Automobiles - The Dreaded Standby Charge


If you are an employee or a shareholder of a corporation that owns or leases the car that you use, you may have an employment benefit called a standby charge. Each year, the standby charge is calculated as 24% of the cost of the car, if the car was purchased, or 2/3 of the lease costs, if the car was leased. In addition, there could be an additional benefit for the operating costs, equal to ½ of the standby charge (if business use is 50% or greater) or 26 cents (for 2012) for each personal kilometre driven. As noted above, the benefit is always 24% of the original cost of the car, even as the car declines in value. Thus, consideration should be given to purchasing the car after three or four years where possible.

If your personal usage of a corporately owned vehicle is low relative to the business usage, there is a possible reduction in the standby charge. Where you drove primarily for business (>50%) and your personal usage km were less than 1,667 km a month or 20,004 km a year, the standby charge is calculated as follows:

Personal use kilometres/ (1,667 x the number of months the car was available to you) x the original standby charge calculated (24% x the original cost of the car or 2/3 the lease costs).

Essentially, the lower your personal use kilometres, the greater the reduction in the standby charge. Based on the formula above, once you reach 20,004 personal km the reduction is eliminated.

Business vs. Personal Usage


For individual and corporate taxpayers who claim a deduction for automobile expenses, the percentage of business use versus the percentage of personal use is often subject to a challenge by the CRA. As support for the relative percentage usage, at a minimum, I always recommend that the taxpayer note the car’s odometer reading as at January 1st and again on December 31st. The reason for doing such is that at least the quantum of kilometres driven in a year will be clear to the CRA reviewer or auditor. The best evidence to support the business use kilometres for purposes of an automobile expense claim is a log book which denotes the client or customer driven to and the number of kilometres the trip took; however, very few people maintain such detailed records. Many people often have to scramble to build a log book by going back up to three years and using their Outlook calendars to rebuild their driving records when asked by the CRA to support their business usage claim. This is not a fun exercise.

Depending upon the auditor, you can sometimes negotiate an agreed upon business/personal usage rate without a logbook; however, where the auditor agrees to this approach, it always results in a reduction of the business use claim by the taxpayer.

The CRA now offers to give some consideration to a log book for a sample period where there is one year of detailed record keeping. The following is what the CRA says in regards to a sample logbook:

The CRA would be prepared to afford considerable weight to a logbook maintained for a sample period as evidence of a full year's usage of a vehicle if it meets the following criteria.

The taxpayer has previously filled out and retained a log book covering a full 12-month period that was typical for the business (the “base year”). The 12-month period is not required to be a calendar year.

A logbook for a sample period of at least one continuous three-month period in each subsequent year has been maintained (the “sample year period”).

The distances travelled and the business use of the vehicle during the three-month sample period is within 10 percentage points of the corresponding figures for the same three-month period in the base year (the “base year period”).

The calculated annual business use of the vehicle in a subsequent year does not go up or down by more than 10 percentage points in comparison to the base year.

In Summary- Documentation is Vital


Claiming and documenting automobile expenses is a tedious and time consuming process. However, if you are ever audited, you will be thankful you undertook the effort.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

45 comments:

  1. Hi

    great blog and thanks for sharing your knowledge.

    I have a corp business, retail for kitchen, and I have passenger car as defined by CRA but I have wrapped the car with advertising for my business. How will this affect the standby charge and operating benefit? Can't I argue that it is advertising 100% of the time?

    Thanks
    Sami

    ReplyDelete
    Replies
    1. Hey Sami

      The CRA will allow the expenditure for the corporate logo and wrap advertising on your car as an expense since it can be expected to enhance or improve the corporation’s income.

      However, I would expect a CRA auditor to still ask for a log to determine the standby benefit. Obviously appearance wise the car appears to have greater business use if there is advertising and that is beneficial. However, if I did not mind driving a logoed car, I could stick a logo on my car and never drive it for business, so the same tests will still apply, but you have a stronger position to start from.

      Delete
  2. thanks

    I knew i would not be off the hook
    Sami

    ReplyDelete
  3. I have a corporation which owns several trucks. The operation is seasonal 6-8 months. During the off season the trucks are still used for administration (e.g. bank, client, supplier visits etc.). Can we keep these trucks as 100% corporation? Do we still require a log?

    ReplyDelete
  4. Anon

    I have never had to look at this issue so I don't know off the top of my head how the CRA views seasonal vehicles, but I think a log would help any argument for business use post your busy season but u should have your accountant review this issue . Sorry I don't have answer for u from past experience

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  5. can a corporation that uses simplify method to claim the mileage and parking expense that incur while doing business. My accountant said no unless i use detail method? is this true.

    ReplyDelete
    Replies
    1. Sorry KC, I dont second guess other accountants on this blog

      Delete
  6. I started my business in August. I did my vehicle expenses using the fiscal year Jan-Dec. The Auditor informed me that only the receipts from August - December were eligible. If this is the case, should only the logs from this period be used? The auditor used the total annual mileage from Jan-Dec but only allowed receipts for the time of operation for my business. Is this correct or is the Auditor trying to pull a fast one on me?

    ReplyDelete
    Replies
    1. Hi Anon

      I would suggest the auditor should use the log for the corresponding Aug to Dec period, especially since this is the first year of a short fiscal period. I would however not make a big deal about it because it is such a short period of time that it would not be in your best interest to put up a fuss in my opinion.

      Delete
  7. Hi there, I stumbled upon your blog via a Google search for claiming business expenses related to vehicles. I incorporated my company on July 31, 2012. I have been keeping receipts religiously since the beginning of 2012, knowing I would be going into business that year. Can I claim My gas receipts without the log book? I am going to log my travel in the following year with an app for my smartphone. Will that be usable as evidence for before the date I started logging my mileage?

    ReplyDelete
    Replies
    1. Hi Jerald

      Most people do not keep a log book even though the CRA requests one. thus you are at the CRA's mercy unless you are willing to go back to your outlook calender and recreate a log. You can claim your gas based on what you think your business mileage is, however, the CRA may not agree. Speak to your accountant for their opinion

      Delete
  8. What about CCA? Can you make an entry into the corp for proportionate business use of CCA if you own the car personally? or since you own the car personally you lose out on the CCA because the corp does not own the asset?

    ReplyDelete
    Replies
    1. Hi Billie

      Speak to your accountant. Some accountants take all the expenses you pay and add a notional CCA and the claim the business portion, others do not like to do that and claim mileage based on KM

      Delete
  9. I like your blog and I have a scenario that I am pondering that is contrary to your recommendation. Assume $100k in income in a small business. Pay it out (@48% marginal rate) and you can buy a $52k car. Leave it in and (@15.5% small biz rate) then buy the $52k car and you have $32.5k left over in your corp. Assuming all operating expenses are paid personally and the car is 100% personal use you would face a standby charge of $12,480 per year with tax of approx. $6k. Ignoring compounding for simplicity it will take 8 years to equal the tax you pay personally upfront. By then the car will likely be worth close to zero and you would have had CCA along the way. Isn't this a better scenario?

    ReplyDelete
    Replies
    1. Hi Daniel:

      You are ignoring the operating benefit which is added to the standby benefit and CCA cannot be claimed on personal use. However, I see where you are going. You would have to run the numbers again accounting for the operating costs to see if your idea makes sense.

      Delete
  10. Great info. Just curious if you know why the standby charge is calculated at 2/3 of lease costs for leased vehicles. Where does the 2/3 come from?

    ReplyDelete
    Replies
    1. Hi Kirsten

      No idea, sorry. I can only assume it somehow equates to the 2% a month for purchased vehicles.

      Delete
  11. Can a Canadian snowbird lease an automobile in the USA and then bring it to Canada for 6 months and then return to the USA with the leased auto? The automobile is leased, licensed and insured in the USA and owned by the leasing company and therefore not owned by the Canadian snowbird. What are the CRA implications, if any?

    ReplyDelete
    Replies
    1. Sorry, I have never looked into this issue and thus I dont know the answer off the top of my head

      Delete
  12. When an employee repays the corporation for the year's standby & operating costs, how is this amount treated on the books by the corporation? It's not revenue, but are expenses reduced by the amount?

    ReplyDelete
    Replies
    1. Anon, not sure why they are repaying the standy benefit to the corp, as it is a personal benefit, but any payment would reduce the auto expense claimed by the corp.

      Delete
  13. Thank you for the detailed explanation of the Auto expense deductions pertaining to the Business vs. Personal portion...I have a couple of questions to ask before I..."scramble to build a log book by going back up to three years and using their Outlook calendars"... I own my own vehicle and use it for business travel...I've been told in the past that commuting to and from the office doesn't apply and I have no issue w/that - I'm going to be submitting a log for an entire year and need to know what is permissible w/when Business KM start.... I leave my house and might make 4 business related stops at various job sites before I reach the office, sometimes not going to the office at all...I havn't found any literature to differentiate about what is acceptable and what isn't....can you clarify from what I've provided or do you need more info - please & thanks in advance

    ReplyDelete
    Replies
    1. Hi Anon

      You should speak to your accountant about your specific situation, but in general, If you stop at sites on the way to your office, it is generally the CRA's view that the mileage would be business. Direct to office and direct from office home is personal.

      Delete
  14. If the vehicle is owner by the company, do you have to do both the charge to the shareholder loan for the personal use and the standby charge? Or is it one or the other? And, if you don't suggest buying a vehicle through a corporation...what is the best way to do it? Own it personally and charge the company for mileage at the rates posted? Or charge the company for the amount based on the prorated figure ($7500 in your example)? I thought mileage was the best, but would appreciate your opinion.

    ReplyDelete
    Replies
    1. Hi Anon

      You would typically only be charged once for the auto and not both a standby and Shareholder benefit.

      The cleanest method is to charge the CRA mileage rate, but I have seen the pro-rated method used also.

      Delete
  15. Hello -
    If I own a car and receive a set allowance monthly I understand that the amount is taxable, correct? Then am I to set a deduction for business use of the vehicle? If so, is it true that when used more than 50% for business that the use of the vehicle (and allowance) is not considered taxable?
    Thanks!
    KK

    ReplyDelete
    Replies
    1. Hi KK

      Not sure what you are talking about. An allowance not based on actual km driven is taxable, but you can claim expenses against that amount if your employer provides a T2200.

      Delete
  16. Great Blog, thank you. In my case my corp (my own) owns the vehicle which is used arguably 100% of the time for business but I claim 10% personal use to fend off arguments. My question is on what constitutes commuting vs business mileage in my case. My corp is registered to my home address in Ottawa at which I have a home office , where I work many days. However I travel to Toronto to see clients almost weekly where I also have a small office I use time to time. Would my trips to Toronto from my "home Office" to see clients be considered commuting or business mileage by CRA?
    Thanks!

    ReplyDelete
    Replies
    1. Hi Anon:

      First of all, unless you have another car you use for all non business driving, you will probably have a tough argument even saying 90%.

      I cannot answer your question. The answer is not entirely clear and would likely be subject to the auditors interpretation and some negotiation. I would suggest your drives from your home to Toronto may be challenged and considered personal by the auditor since mileage from your home to your office is considered personal as would likely office to office driving, however, I can see why you would consider it business. The reality is in situations such as this, the auditor would likely increase your personal useage and you would probably accept it or negotiate a slightly higher number since the cost and time to fight an auto mileage reallocation is rarely worth the time and effort.

      Delete
  17. Hi. I work for the Canadian subsidiary of an American multinational. This company does not have any central office in Canada - i.e. all employees (Sales as well as Technical) work from their home offices. I am in a technical position and travel extensively for business. Although most travel is by car within Ontario and adjacent US states, a significant portion of car travel is from my home in the Niagara peninsula to/from Toronto airport. Is this home to/from airport mileage (for business travel reasons) on a company leased vehicle considered business use by the CRA? (note: I used to take airport limos but it is not only expensive but terribly inconvenient as they force customers to long delays in their "milk runs" picking up other passengers).

    ReplyDelete
    Replies
    1. Hi Anon

      Great question, unfortunately I have never had any reason to look at the issue and don't know the answer off the top of my head. I did a quick search and could not find an answer, sorry.

      Delete
  18. I have just incorporated a home based consulting business. I pay for all of my vehicle expenses personally, and I am tracking my km used for work (to and from clients). I then plan on expensing this mileage at 52cents for first 2,000 km and then 47cents after that. Is this an acceptable way of reimbursing myself for use of vehicle? Also - I am planning on claiming HST at the business level.

    ReplyDelete
    Replies
    1. Hi David

      First of all, the automobile allowance rates for 2015 are:
      •55¢ per kilometre for the first 5,000 kilometres driven; and
      •49¢ per kilometre driven after that.

      Secondly, I dont provide tax planning advice on this blog, that being said I have seen your suggestion used by others.

      Delete
  19. If you rent a car, do you need to keep a mileage log book against each rental? I am debating on doing a monthly rental instead of leasing a car as a commissioned salesperson with a T2200...

    ReplyDelete
  20. As a shareholder who owns a vehicle used for business that claims motor vehicle expenses (fuel, r&m, parking, insurance etc) in the corporation against my shareholder loan is it possible to include the lease payments as an expense in the corporation against my shareholder loan or should that be claimed on my personal tax return? Thx

    ReplyDelete
    Replies
    1. Hi Unknown

      Speak to your accountant, this is not a simple answer as there are various factors including restriction on lease costs, let alone personal vs business and where the expenses were paid from.

      Delete
  21. I am a new business owner. I have 2 personally owned vehicles, a car and a truck I use solely for business purposes. I want to add the truck to my company's assets but I am unsure of what value to use... it is a 1993 truck but in top condition and I had it professionally appraised at $16,000. Can I use this value?

    ReplyDelete
    Replies
    1. Hi Unknown

      If u have a professional appraisal, that should be sufficient for the CRA.I will not comment on whether there are any tax issues u need to consider if you transfer the truck, since you should discuss this with your accountant.

      Delete
  22. CRA is now disallowing Highway Tolls as an "option" saying other possible routes without tolls exist and could have been taken. They are exceeding their remit yet again. In LeRiche v. The Queen, 2010 TCC 416 the Judge stated “the Court must not second-guess the business judgment of the taxpayer. … to effectively carry on his operations."

    ReplyDelete
    Replies
    1. Hello,

      I know this post is old but I've also recently been denied highway tolls as an employment expense by the CRA because it's a "personal choice". I cited the court case above in a letter to argue the denial but the CRA has still denied the expenses. Has anyone had any luck winning this argument with the CRA?

      Thanks!

      Delete
    2. Hi Anon

      I have not had anyone fight tolls, so I have no personal experience

      Delete
  23. Good morning, Mark.

    I asked this question in an older post, but I will repose it here, as this seems to still be an active thread.

    My question is how a CRA auditor would determine personal use kilometers when no log or record has been kept.

    In this particular case, the employee claimed 1500 personal use kilometers, and had a very small stand by and operating charge. This was demonstrably false, as the employee has a 50km round trip from his home to office, so just that personal use would amount to at least 9600 km per year. Additionally, he has no personal vehicle, so all his driving is done in this personal truck.

    This individual has no log whatsoever.

    When challenged by a CRA auditor about he amount of personal use kms, he will be unable to substantiate his claim in any way.

    With the CRA having no basis for determine the amount of personal kms used, how do they proceed? Is there a standard formula they use in cases like this (ie they deem 50% to be personal use)? Or do they assume it is 100% personal use, and the onus is on the employee to reduce that amount by providing as much proof as possible? Or something else?

    Furthermore, can you comment on possible consequences for an employer in a situation like this? The employer would have known that the amount being claimed as personal was a drastic misrepresentation.

    Thank you kindly for your (blunt) useful advice!

    ReplyDelete
    Replies
    1. I think you asked the same question earlier today on the audit blog, see that answer.

      Delete