Drivin’ my life away…lookin’ for a sunny day…
Certified QuickBooks ProAdvisor
The information provided in this article has been compiled as a REFERENCE TOOL ONLY. This is by no means a complete discussion of automobile expenses. Please refer to the Income Tax Act, CRA updates and rulings.
Cars, Trucks, Van’s SUV’s, you would think that vehicles would be a simple subject. You pick a color, a style, a shape, a size, a type of fuel, a few accessories and voila, you have a machine that transports you from A to B. That was before you considered extremely complex tax consequences of ownership and operating costs.
There is absolutely no way I can cover all of the consequences in this short article. Various accounting firms and professional publishing companies that distribute whole books on this topic. I will provide some resources and comments that could save you much grief if you were not aware of just how many pitfalls there are in this area of taxation.
Who needs to know about car expenses and benefits? Every accountant as well as...
Employees and Employers who must consider…
- Employees can deduct car expenses if the employer provides a Declaration of Conditions of Employment T2200 or in Quebec a Form TP-64.3-V General Employment Conditions
- Salespersons on commissions or contract negotiators are limited to deductions based on income from commission or by reference to volume of contracts negotiated
- Special rules exist if you are employed in selling or leasing vehicles as a manager or sales person, but not in an administrative role, such as parts or service or senior executives.
- Personal use counts when you use the vehicle to get to and from work. If you use the vehicle for business along the way, it is employment use. If you do not take the car home at night, using it exclusively for business, you will not have a taxable benefit.
- CRA provides guidelines about what is considered a reasonable allowance for distance traveled and posts it each year in a news release
- Employers may refuse to pay allowances or reimbursements because documentation is inadequate and will jeopardize employer deductions and claims for GST input tax credits
- Employees need to understand the different tax consequences when
- A) Employee provides the car
- Reimbursements of expenses must be included on the T4, there are no GST implications and tax is withheld at source
- Allowances must be included on the T4 as additional salary when not reasonable or not based on distance
- Low Allowances when less than expenses, employer doesn’t have to T4 but the employee may choose to include in income and claim expenses or not include in income and not claim expenses
- Tax free Km reimbursements where reasonable and based on distance
- If you receive an allowance and also are reimbursed for expenses, the whole allowance is taxable
- Low Interest loans will generate a deemed taxable interest benefit based on the difference between the rate the employer charges and the rate set by the government
- B) Company provides the car to employee; employee includes taxable benefit in income, recorded on their T4
- Benefit depends on the type of vehicle, see what type of vehicle it is below
- Standby charges for vehicle availability of automobile, low personal use might reduce standby charges
- Or...Personal use benefits for motor vehicle use
- Operating cost benefits relating to personal use of all vehicles, regardless of type of vehicle
- Optional method of calculating operating costs benefits
- GST component of standby and operating cost benefits
- If employer saves you money, it’s likely to give you a taxable benefit on your T4
Self-employed persons must consider:
- Car expenses apportioned between business and income
- Buy/Lease decisions
- Interest expense
- Accidents while working are an expense, but not while on personal time
- Parking at your office is considered personal expense
- Change in use results in deemed dispositions and tax consequences
- CCA on change in use, CCA, GST and Record keeping
Rental property owners must consider:
- Income tax and GST implications when rental properties are a business or if you own two or more rented properties you can deduct car expenses for rent collection, supervision of repairs and maintenance and management, even if not located in the area where you live
- If you own one property outside the area where you live you may be able to record expenses for travel to that site.
- Reporting and Record keeping
What are the issues to consider?
Lease versus buy? Make sure you consider all the benefits and costs. There are many analysis tools available including most bank websites. My favorite is Envision Credit Union Lease versus Buy Planning Tool
A word of caution on lease versus buys, this is never a simple calculation and these quick tools can be deceptive. I have found that the timing on leases and purchases of luxury vehicles can substantially affect the expense claim. Be very cautious of calculations of capital gains and losses because there are special deeming provisions that may kick in to change the value you thought should be claimed.
One thing to watch out for is the treatment of lump sums on leases at either the start or end of a lease.
- Lump sums at the beginning of a lease can reduce lease payments, but increase employee taxable benefits.
- Taxable benefits and allowable deductions may be totally independent of each other.
Administration of ownership and benefit calculations has a cost.
Paying tax free km is quick, easy and definitely less expensive in terms of administration costs.
Who should own the car?
Consider if the vehicle available throughout the year, is for employee personal use or is the vehicle only available part of the year?
What type of vehicle is it?
- Motor Vehicles
- Not every vehicle is a motor vehicle
- Not every motor vehicle is an automobile
- If you see it on the street, it’s probably a motor vehicle
- Some motor vehicles are considered to be automobiles for tax purposes
- Vans and Pick-up trucks, etc. are not automobiles when they are:
- Used more than 50% to transport goods or equipment in the course of earning income AND carry fewer than 4 people including the driver OR...
- Used 90% or more for transporting goods, equipment or passengers in the course of earning income
- Not every automobile is a passenger vehicle
- Ordinary cars, some vans and pick up trucks except those that are Motor Vehicles because of their use for transport above
- Carry passengers, no more than 9 people including the driver
- Passenger vehicles
- Automobiles acquired/leased after June 17, 1987
- Ambulance, taxi, (class 16, 40%) bus or hearse
Acquisition and disposition
- Class 10 30%
- (Half-year Rule: 15% in year acquired) no CCA in the year disposition occurs
- Cost is purchase price plus GST and PST
- Recapture on disposition based on average usage for business over life of vehicle
- No terminal loss allowed against employment income, only allowed against business or property income
- May include several assets and may be pooled with other Class 10 assets to avoid recapture
- Class 10.1 30%
- (Half-year Rule: 15% in year acquired and 15% in year of disposition)
- No recapture or terminal loss
- Prorated CCA claim in year of disposition
- Cost is limit plus GST and PST
- Each vehicle considered a separate pool
- Additions considered part of capital cost and subject to limit at acquisition as if installed at date of purchase
What are the limits for claiming CCA, interest and leases? If you lease or buy a higher priced car, there will be a limit on your claim in 2006:
CCA ceiling (plus PST & GST)
|Deductible leasing costs plus taxes
|Interest on car loan
|Taxable benefit personal portion of auto op. expenses
|Km Reimbursement -tax free -First 5000 km
Change in use
From personal to employment or business, cost is lesser of fair market value at time of change in use to business use or original purchase price plus half of any capital gain realized on deemed disposition (usually cars depreciate so it’s usually fair market value) Add this to the CCA class.
If you stop using a vehicle for employment or business, deemed disposition of fair market value occurs. Fair Market Value deemed is added to your CCA pool.
Deemed acquired cost if you lease and then buy it for less than fair market value is the lesser of FMV at acquisition and total of purchase price and lease payments (assuming arms length lease). If deemed cost exceeds purchase price, CCA is reduced by the excess. When vehicle is disposed of, capital cost is higher deemed cost and subject to recapture.
CCA can only be claimed if you are still using the car for employment purposes at the end of the year.
Each year you reduce the capital cost by the total of the CCA and then allocate a portion of the CCA to business and the rest to business. The class is reduced by the full CCA claim, even though you only deduct the business portion.
Section 85 Rollover
Way too complex for this article, but possible under S. 85(1) (e.4)
GST ramifications (not a comprehensive list)
- GST of 7% is added to all taxable benefits and employer pays the GST
- Items not subject to GST such as PST, insurance, license costs, driving outside of Canada not included in calculation of GST on operating cost benefit
- Optional calculation of operating costs benefits (1/2 reasonable standby charge), GST is half GST applicable to GST on standby charge
- Employees don’t pay the GST on taxable benefits, but they pay tax on the 7% benefit added to their T4
- A car allowance is not subject to GST
- Employees can claim a GST rebate if employer certifies they were not paid any tax free allowance in respect of expenses for which you are claiming a rebate. Rebates are claimed on Form GST370 if employer is a GST registrant and the employer would have claimed an Input Tax Credit had it paid the expense instead of you. If you include a tax free allowance in your income in order to offset it against expenses, you can not claim the GST rebate. Eligible expenses include oil and gas, repairs, CCA, lease costs and operating expenses so long as GST was paid.
- GST rebate is included on the tax return the following year and apportioned between a reduction in CCA and income
- If you sell a vehicle you may have to charge GST if you are a GST registrant
- You may be able to claim a GST rebate if you are a GST registrant dependent on your commercial use. You can only claim the GST as an input tax credit when you purchase the vehicle if your business use is over 90% in the year of purchase. If the use is between 50% and 90%, you can claim an ITC based on CCA claimed at 7/107 of the business portion of the CCA claimed in the year. Deemed dispositions can occur when use drops below thresholds of 50% and 90% and GST must be remitted on fair market value when changes in level of commercial activity occur.
Operating costs include
- License for vehicle
- Car wash
- Grease and oil
- Gasoline net of any rebates
- Servicing costs
- Minor repairs
- Major repairs including repairs of damage for accidents net of insurance proceeds if accident occurred while on business
To apportion costs between business and personal use Km logs are required in all cases. See ProConnection March Edition , under Creatures of Habit article, an article about keeping Km logs.
Usage logs where use is frequent but distance traveled is low may be appropriate to allocate CCA or lease costs and operating costs using a formula of distance traveled and time used for employment (note that you still need the distance traveled to make the calculation).
Where do you go for information? This is not an exhaustive list, but it’s a good start…
- CRA Website
- Motor vehicle expenses (automobile)
- T4002 Business and Professional Income 2005
- T4037 Capital Gains 2005
- T4036 Rental Income - Includes Form T776
- T4044 Employment Expenses 2005 - Includes forms GST370, T777, TL2, and T2200
- RC18 Calculating automobile benefits
- IT63R5 Benefits, including Standby Charge for an Automobile, from the Personal Use of a Motor Vehicle Supplied by an Employer - After 1992
- IT521R Motor Vehicle Expenses Claimed by Self-Employed Individuals
- IT522R Vehicle, Travel and Sales Expenses of Employees
- Income Tax Act
- Sections 6, 8, 13, 15,20,67,85,248
Take time to plan…
- Structuring leases and buyouts can significantly affect the amount of claim for expenses over the years of leasing/owning
- How you choose to use a company vehicle by reducing availability for personal use will reduce taxable benefits.
- Don’t take the car home at night or while you are on holidays.
- Choose a motor vehicle rather than an automobile
- Consider settling for a less expensive, more efficient vehicle
- Transfer ownership to a lease to reduce standby charges on an older vehicle
- Reduce personal use to reduce standby or personal use benefits
- Elect optional operating cost benefits
- Ensure you pay reimbursements within the year for standby charges and within 45 days after the year end for operating expenses to mitigate T4 benefits
How do you cope with all these rules?
Consider a policy of never answering questions from anyone about vehicles without researching the question. Explain that you will need to charge for your time to do the research before you start the work. Get approval to charge for your time before you research the alternatives and examine the rules for consequences of their particular usage and fact pattern.
Review: the type of vehicle, acquisition, dispositions, percentage of intended use for commercial purposes, possible change in use and deemed dispositions, GST consequences, taxable benefits, record keeping and ownership carefully before advising about vehicles.
Auto expenses are one of the more complex areas of taxation. There is cross over of consequences from employee to employer, from self-employed to corporate and partners.
Not only are automobiles a cost of doing business, they are status symbols, we define ourselves and who we know by the car they drive. How often do you identify someone by the car they drive, especially if it’s an antique Corvette? You remember Peter, don’t you? You know, you say, Peter’s the guy with the Blue Corvette.
Me? I drive a hairless Honda Civic. My husband calls it the EDTS just to bug me. EDTS stands for Emergency Dog Transport System. That’s because our dog is a Belgian Sheepdog with way too much hair who whines for her own window. She only gets a ride in an emergency.
She is not a business expense. So, she and I have a pact, we walk, rain or shine.