Automobile expenses

Rather than providing your employees with a vehicle, it may be more tax-effective for the vehicle to be acquired by the employee personally. If it’s used for business purposes, the employee may be able to claim certain deductions. If this is the case, beware—the rules governing automobile deductions are complex and, as such, cannot be covered here in any great detail. They apply equally to corporations, sole proprietors and partnerships, as well as to employees who qualify to claim automobile expenses against their employment income.

Expenses must first be split into two categories: those that are subject to specific dollar limitations and those that are not. Depreciation, interest and leasing charges are subject to specific dollar restrictions. The maximum amount that can be depreciated for vehicles is $30,000 (plus PST and GST or HST on this amount). GST/HST is not included in the depreciation base if it’s refunded as an input tax credit.The maximum monthly interest deduction is $300 and the maximum monthly lease amount that can be written off for tax purposes is $800 (plus PST and GST or HST on this amount). A separate restriction pro-rates deductible lease costs when the value of the vehicle exceeds the amount that is deductible for tax purposes.

For unincorporated businesses and employees, the total of the restricted and unrestricted expenses is then pro-rated between business and personal use, based on the number of km driven for each purpose. Expenses incurred entirely for business purposes, such as parking, can be claimed in full. Corporations do not have to pro-rate expenses between business and personal use. Expenses can be claimed in full, provided they are reasonable. However, the employee benefit rules may require a benefit to be included in the income of the employee.

Tax tip: Detailed records should be kept regarding a vehicle’s business and personal use. These records must be accurately maintained to support the percentage claimed for business use. Keep in mind that it is the CRA’s position that travel between a taxpayer’s regular workplace and home is considered personal.

Self-employed persons and business use

The CRA has a policy regarding the documentation that can be kept to support the business use of a vehicle that is used partly for business and partly for other purposes. This method involves establishing the business use of a vehicle in a base year, and then keeping detailed records for at least one continuous three-month period in each subsequent year. The results can then be extrapolated. This method is only available to self-employed persons. It cannot be used by employees who use their vehicle for employment purposes.