Automobile expense rules can be really complicated, especially for company owned vehicles because of the limitations on depreciation, lease and interest expenses and the need to think about taxable benefits that might accrue to the driver of the vehicle.
Automobile expenses tend to require lots of administration and present significant tax risk because CRA views them as an easy target for disallowance and/or taxable benefits.
Here are the general rules of thumb we recommend to our clients.
1. Buy, don’t lease. Leasing tends to be more expensive and the “tax benefits” promoted by the leasing companies tend to be overemphasized.
2. If you use the vehicle less than 90% for business, don’t put it in the company name because you don’t want the administrative hassle of calculating the taxable benefit to the users.
3. For company owned vehicles, keep track of all the operating expenses in the accounting records.
4. For personally owned vehicles, don’t try to track all of the expenses in the accounting records. All you need to do is keep a log of the business use of your personal automobile(s). Your accountant can use that log to multiply the business kilometers by the appropriate rate per kilometer to give you an accounting credit to your shareholder loan in the company books on an annual basis. This method eliminates the need for you to track any the details of your actual automobile costs, thereby saving you some bookkeeping effort and cost. In our experience, the amount of deduction you get is equal to or greater than the amount you would get from tracking the expense details and then removing the personal use element.
5. Don’t forget to impute the GST input credit implicit in the automobile allowance. Keep an automobile log no matter who owns the vehicle. It’s one of the first things the CRA auditor is going to ask for. If you have it, it’s very hard for her to attack your automobile expenses. If you don’t, she’ll be licking her chops in anticipation of the expense denial.
Keep it simple, reduce your administrative cost and minimize your tax risk.
If you need an Automobile Log, let us know. We give them to our clients free of charge.
Written by: Doug Johnstone