Maximizing your tax deduction for the business use of your
car.
Employees
Employees can be compensated for the use of their car in two
ways.
1:They can receive a per kilometre
amount for each business kilometre travelled. Revenue Canada
(CCRA) has maximums for each year.
2:They can receive a fixed monthly
car allowance. This amount is taxable to the employee. However,
if the employer provides you with a T2200, stating you are
required to use your own vehicle for business purposes, you
can total the costs of running the car, gas, licence, insurance,
repairs and lease costs or interest on a loan plus a depreciation
of the cost. You then prorate these expenses by dividing them
by the total mileage in the year and multiplying by the business
mileage.
You can see that in both cases CCRA expects you to keep detailed
records and logs to show how you calculated your mileage.
Entrepreneurs
Proprietors (unincorporated owners) use the same formula as
in two above, a proration of business mileage to total mileage
of all the expenses during the year.
Corporations have very different rules. It is only tax advantageous
for a corporation to own a vehicle if it is driven more than
90% on business. In this category, the company gets a 100%
deduction and the owner/employee has no personal tax effect.
(It is important to note than in all calculations of business
mileage, driving to the office is not considered business
travel)
If you fall into the below 90% usage category, if the company
owns or leases the vehicle, the vehicle user is subject to
a taxable benefit, based on the original cost of the vehicle,
or lease payments. This taxable benefit results in an income
inclusion of over one third of the original cost or lease
payments, and over a period of years becomes very costly.
My advice is, if in doubt, it is far better to own the vehicle
personally and charge the company for its use on a per kilometre
basis. This is an area CCRA audits every time they audit a
company and to prove the above 90% mileage you must have an
accurate logbook. My experience is that few people can be
bothered with logbooks.
I know, now you are asking should I lease or should I buy?
That’s a topic for another time. Happy driving!
Harry Taylor C.A. is the owner of an accounting practice
dedicated to serving the entrepreneur. He is also a speaker
and author and is available to conduct seminars on financial
planning and maximizing business potential. Reach him at www.harrytaylor.com
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