How to handle automobile expenses has become quit an issue and Canada Revenue is paying particular interest to this area of potential taxation. Below are several different ways to handle these expenses and some helpful tips.
Proprietors and Partnerships
Auto mobile expenses are reported on the personal tax return using a form T2124 or T2125 and the attached auto expense supplement. All of the automobile expenses are reported in total and allocated between business and personal using the mileage. Expenses that can be reported are: gas, oil, repair and maintenance, insurance, interest cost on car loan, amortization of the car or lease expenses. The key here is all of the expenses are reported then split using the mileage. ( See Mileage Log below ).
When a company owns the vehicle it can become much more complicated. There are company vehicles such as trucks and vans that are used 100% for business. As long as these do not go home with an employee then all the expenses attached to this vehicle can be paid for and expensed by the company.
When an employee or shareholder of a company has the use of a company owned vehicle then it becomes much more complicated. Canadian tax law says that there is a taxable benefit to the employee if he uses a company vehicle for any personal use. This is called a standby charge and is calculated using total mileage and personal mileage as a key part of the calculation. Please see our more detailed description of this in this Taxation area of the web page.
By far the easiest method of car expense is when the employee or shareholder owns their own vehicle and is paid a mileage allowance. The company can pay a tax free allowance based on mileage at a prescribed CRA rate. This is non taxable to the car owner and is a tax deduction to the company. In this case business mileage must be kept to calculate the allowance amount.
Canada Revenue wants the car driver to keep a daily mileage log to prove the mileage for business and personal use. Tax law does not say you must keep a mileage log it does say you must be able to prove your automobile usage. We know that keeping a mileage log may be a lot of work. Our recommendation is that you do the following:
1. Get the odometer reading of your automobile on the fist day of the taxation period and the last day of the taxation period. This obviously gives you the total mileage.
2. Use your business calendar ( paper or electronic ) to write down the business mileage per each item on a daily or weekly basis. This captures the business portion of the mileage.
3. For company owned automobile you can now calculate the total and personal mileage and for personally owned vehicles you can calculate the business mileage to be charged to the company.