Many small business Owner-Managers use their personally owned vehicle in performing the every-day duties of their incorporated business. This is an approach that often makes sense where the nature of the business is such that there is no need for a separate, corporate owned vehicle. In these cases, owning a vehicle that is used for both personal and business purposes in the owner’s personal name, instead of in the corporation, helps avoid the potential shareholder benefit issues that can arise where corporate owned vehicles are used for personal purposes.
While most small business owners understand the concept of a personally owned vs. corporate owned vehicle, what many don’t understand are the specific tax rules and rates that govern the deductibility of expenses in relation to personally owned vehicles, and what specific documentation is required to support these expenses in the event of a CRA review or audit.
If you are an incorporated small business owner and you use a vehicle as part of your business operations, here are a few things you should know before claiming the related expenses:
Mileage Rates
The Department of Finance sets specific income tax deduction limits and expense benefit rates that apply when using an automobile for business purposes. On December 19, 2019, Finance confirmed that the limit on the deduction of tax-exempt allowances paid by an employer to an employee, who uses a personal vehicle for business purposes, will be set at 59 cents per kilometer for the first 5,000 kilometers (increased from 58 cents in 2019), and 53 cents for each additional kilometer (increased from 52 cents in 2019). Visit www.canada.ca for more information.
What Can be Deducted?
For small business owners who only have one vehicle, or who wish to use their personal vehicle for business purposes, claiming a mileage expense in the corporation based on the Department of Finance tax-exempt allowance rates is a good way to reimburse themselves for the portion of vehicle operating and maintenance costs attributed to the business use portion. For owners wishing to take this approach, it is important to keep in mind that the actual costs incurred in relation to the personally owned vehicle will not be treated as a deductible expense to the corporation as the allowable mileage rates are intended to serve as the maximum allowable deduction in relation to business use of a personal vehicle. Any personal vehicle expenses paid for by the corporation during the year should be either reimbursed by the shareholder, or recorded as a debit to the Shareholder Loan account (funds owed back to the corporation).
Corporate Owned Vehicles
Where a vehicle being used for business is owned by a corporation, the tax treatment for vehicle expenses is different from where the vehicle is owned personally in that the corporation will have the ability to deduct actual expenses incurred, instead of claiming a vehicle allowance based on the prescribed per kilometer rate. This approach makes sense in cases where an owner-manager has their own separate vehicle for personal use, and utilizes a corporate owned vehicle for business use only (any personal use is negligible).
While there would not be a mileage allowance expenses claimed in relation to corporate owned vehicles, a need to monitor and track business usage still exists as personal use of a corporate owned vehicle by an employee or shareholder of the corporation can result in a taxable benefit. The following types of benefits can arise where a corporate owned or leased vehicle is made available for personal use:
- Standby Charge – A taxable benefit calculated based on the cost of the vehicle (purchase cost or lease costs) made available to an employee and the number of days during the year that the vehicle was made available. The benefit is reduced by any costs reimbursed by the employee.
- Operating Expense Benefit – A taxable benefit which arises where a vehicle is provided to an employee and the corporation pays for expenses related to the personal use of the vehicle. The operating expense benefit can be calculated based on the fixed rate of 28 cents (including GST/HST and PST) per kilometer of personal use (25 cents per kilometer for taxpayers employed principally in selling or leasing automobiles) or if certain criteria are met, 50% of the standby charge for the year (before deducting reimbursements).
The Department of Finance has also set the following limits pertaining to the deduction of costs related to corporate-owned vehicles:
- The ceiling on the capital cost of passenger vehicles for capital cost allowance (CCA) purposes is set at $30,000 (plus applicable federal and provincial-territorial sales taxes) for non-zero-emission passenger vehicles, and at $55,000 (plus applicable federal and provincial-territorial sales taxes) for eligible zero-emission passenger vehicles. These ceilings restrict the cost of a vehicle on which CCA may be claimed for business purposes.
- The maximum allowable interest deduction for amounts borrowed to purchase an automobile is set at $300 per month for loans related to vehicles acquired after 2019.
- The limit on deductible leasing costs is set at $800 per month (plus applicable federal and provincial-territorial sales taxes) for leases entered into after 2019. This limit is one of two restrictions on the deduction of automobile lease payments. A separate restriction prorates deductible lease costs where the value of the vehicle exceeds the capital cost ceiling of $30,000.
Mileage Logs, Trackers, and Other Support
The deduction of mileage and other vehicles expenses is an area that has come under significant scrutiny from the CRA in recent years. For any business owner claiming either a mileage expense for the business use of a personal vehicle, or vehicle expenses relating to corporate owned vehicles, it is important to be aware of the supporting documentation that will need to be retained in the event of a CRA review or audit.
In the case of vehicle expenses claimed for the business use of a personally owned vehicle, the most important documentation to retain in support of the expense claimed is a logbook with details of business trips made during the year. A CRA review or audit of these expenses will require the taxpayer to produce a detailed vehicle mileage log supporting the distance and business nature of trips made during the year. Each logbook must be kept for a period of 6 years from the end of the taxation year for which it is used to establish business use of the vehicle.
The CRA recommends that logbooks be maintained which provide the following information for each business trip made during the year:
- Date
- Destination
- Purpose
- Number of Kilometers driven
For corporate owned vehicles, the CRA also requests that the odometer reading of each vehicle be recorded at the start and end of the fiscal period. In a CRA review or audit of expenses relating to corporate owned vehicles, it is important to have a detailed mileage logbook on hand in order to support the position that there was no personal use of the vehicle to which the expenses relate (i.e. all kilometers driven relate to business purposes), and that no standby charge or operating expense benefit should apply.
More details regarding the CRA’s policies for the maintenance of vehicle logbooks can be found at the link below.
For more information regarding deductible vehicle expenses, or assistance in making sure that you can adequately support your expenses in the event of a CRA review or audit, contact Gregory Harriman & Associates LLP by email at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 1-403-934-3176.
Disclaimer
The information in this publication is current as of July 17, 2020.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Gregory, Harriman & Associates LLP to discuss these matters in the context of your particular circumstances. Gregory, Harriman & Associates LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.