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.

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.