DEDUCTING VEHICLE EXPENSES IN YOUR BUSINESS

Originally published on October 29, 2007

 

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.

First if the vehicle is owned by the company then 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.

Alternately, if the vehicle is owned personally and used in the business then the employee can charge the company a non-taxable allowance of $0.50 per km for the first 5,000 kms and $0.44 per km thereafter.  For the company this is a deductible expense and in most cases would include a refundable GST input tax credit.

It all starts with a logbook

The CRA requires a logbook to prove the business and personal mix of your vehicle.  This logbook should contain the date, the destination, purpose and the distance traveled for each trip.  If you’ve always claimed a standard 60% of your vehicle expenses, without evidence to support this claim, then 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 your own logbook. Although this sounds cumbersome, an easily accessible calendar in your car, home or office on which you record your daily business trips may be all you need.

In or out

Should the car be purchased by the company or the employee?  As mentioned earlier, the vehicle expenses can be deducted either way.  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 kms driven annually and the percentage business use.

Do the math

We have generated an example, using the following data: 

Cost of vehicle

$30,000

Percentage business use

 60%

Total annual kms

30,000

 

 

In this example, we have calculated a standby charge of $7,191 which must be included in the employee’s T4.  The actual deduction to the company is calculated to equal $8,425 giving us a net benefit of $1,234 by owning the car in the company instead of personally.

We have generated a second example to illustrate how a change in one of the variables will change the result.  In this example we use the following data:

Cost of vehicle

$30,000

Percentage business use

 30%

Total annual kms

30,000

In this example, we have calculated a standby charge of $11,988 which must be included in the employee’s T4.  The actual deduction to the company remains the same at  $8,425 giving us a net disadvantage of $3,563 by owning the car in the company instead of personally.

If you received a non-taxable allowance then don’t forget the non-deductible costs you incurred to drive your car

Let’s revisit the non-taxable allowance alternative, using our first example.  If the vehicle was owned by the employee, the company would pay a non-taxable allowance of $8,220 (5,000 km at $0.50 per km plus 13,000 km at $.44 per km) to its employee.  While we have replaced the standby charge which 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.

In closing, choosing the most efficient means of deducting your vehicle expense should be done on a case-by-case basis.  While it’s easy to generalize, look over the numbers and do your 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, e-mail at allyn@hth-accountants.ca or website www.hth-accountants.ca. He is also involved in the family farm near Loreburn, Saskatchewan.  The opinions expressed in this column are for information only.