New cars today are laden with an array of gadgetry that can both amaze and perplex. There's often a steep learning curve from wow factor to actual utility.
At least the result is fun and fulfilling. But there's another element to vehicle use that is even more intimidating: the tax labyrinth one must navigate in regard to the use of an automobile for work purposes.
If you're self-employed, the process is relatively straightforward. You deduct the portion of expenses for running your car that is related to business use. These costs normally include fuel, oil changes, repairs, tires and even car washes, as well as insurance premiums and loan interest or lease payments. If, for example, one-third of the kilometres driven are for business or professional purposes, you can deduct one-third of those expenses, says Tony Italiano, a tax partner with KPMG.
You also can deduct depreciation in the form of a capital cost allowance (CCA), to the extent the vehicle is used for work purposes. The allowable CCA is 15% of the vehicle's purchase cost in the year of purchase, and 30% on the remaining balance in subsequent years. However, note that there is a limit to how much in financing costs and CCA you can claim on a passenger vehicle. Basically, only those with a purchase price of $30,000 or less can be fully depreciated over time. (This amount is less for older vehicles.)
The maximum deduction allowed for loan interest is $300 per month and, for lease payments, $800 a month, plus sales tax (less any input tax credits you can claim for HST/GST/PST purposes). Note the maximum amount of the lease payment you can deduct may actually be less than $800, based on a complex formula. The CRA considers an up-front "balloon" (or down) payment on a lease to be part of your leasing cost in the first year, which may restrict how much you can deduct for that year. (For the most part, a balloon payment is the same as a lease down payment.) However, the full balloon-payment amount may be deductible if this amount divided by the number of months in the lease, plus your monthly payment, does not exceed the monthly lease payment deduction limit.
You should use a log to keep track of when you use the car for work-related purposes, noting the date, purpose and distance driven. As with all relevant receipts, you must be prepared to provide this information to the tax authorities if requested. If your employer reimburses any of your automobile expenses, these amounts are not a taxable benefit, as your employer has not provided you with a car.
Also, notes Italiano, "driving to and from your normal workplace normally is considered to be personal use, unless you drive directly to visit a client or supplier, in which case the distance driven from departure from home would qualify as business use."
The situation becomes more complicated if you are an employee and are provided with a vehicle by your employer or are required to use your own for work purposes. Depending on your circumstances, you'll almost certainly need the help of a certified public accountant or other tax specialist to identify the optimal tax solution for you.
If you use your own vehicle for your job
In many cases, employees are paid a non-taxable allowance based on the number of kilometres they drive their own car for work-related purposes. However, if this isn't the case, then you can deduct operating costs from your employment income. "Where the non-taxable allowance paid is less than the employment-related expenses incurred, you can include the allowance in income and deduct employment-related costs for the year," Italiano says. Your employer must provide you with CRA Form T2200 (and if a Quebec resident, Revenu Québec Form TP-64.3-V) that certifies you are required to use the car for your job.
The various expenses are the same as mentioned above for self-employed automobile use, including loan interest and lease payments, subject to the same restrictions. You may also be able to claim a GST and/or HST rebate on sales taxes paid on automobile expenses, as well as on the amount claimed as capital cost allowance.
If your employer provides an automobile
Using a company car for personal use is an attractive perk for employees, but one that also comes with complicated tax consequences in the form of a taxable benefit. This amount is normally is calculated by your employer and reported in the Taxable Benefits box on your T4 employment-income slip. The rules and procedures are extremely complex, and best left to experts (both your employer and your own advisor). However, if you have a company car it's worth acquiring a basic knowledge of all the twists and turns so that you can work out the best arrangement with your employer in order to minimizes your tax hit.
An automobile-use taxable benefit has two components: standby charges and operating expenses.
Standby charge: For a company-owned vehicle, this is 2% of its original cost per month, or 24% a year. If the vehicle is leased by the company, the standby charge is two-thirds of the monthly lease cost. This includes any up-front balloon payment, which for the purposes of the calculation is prorated over the length of the lease. In some cases, your standby rate can be reduced, but generally speaking your business use must be greater than 50% while your personal must be less than 20,000 kilometres driven per year.
There is an additional potential means of reducing a standby charge, based on how long the vehicle is made available to you. The charge is based on the number of days that it is at your disposal, based on 30-day periods. If you can limit the availability during the course of a year -- such as by parking the car on company premises while on business trips or on vacation -- the 2%-a-month standby charge can be reduced. "For example, if you can get the number of available days down to 345 for the year, the standby charge will be reduced to 11.5 times 2% of the automobile cost, instead of 12 times," Italiano says. "To qualify for this reduction, you must arrange for your employer to formally require that the vehicle be returned to them during those periods of non-use."
Operating expenses: The taxable benefit also includes 26 cents per kilometre of personal use, which represents operating costs. If your business use exceeds 50%, there is an alternative calculation. "If you notify your employer in writing by Dec. 31 that you wish this option, the operating costs benefit will be a flat 50% of the standby charge," Italiano says. An example of where this method may be beneficial is if the cost of the car is relatively low and your personal use is high (but less than 50% of the total distance driven).
In some cases, an employer may pay only part of the operating costs. If their contribution is relatively minor -- such as only paying insurance premiums -- it may be advantageous for you to negotiate an arrangement where you pay all of the operating costs and thus avoid the 26 cents-per-kilometre taxable benefit, Italiano says. If the terms of the company car do not give you that option, "you should arrange to repay the amount of the employer's contribution by Feb. 14 of the following year," and thus avoid the per-kilometre rule, he says.
In general, the CRA allows the employer to reduce the operating expense benefit attributable to personal use, Italiano says. "The portion of the operating expenses that relates to personal use is the percentage obtained by dividing the number of personal kilometres by the total number of kilometres driven by the employee during the year while the automobile was available to the employee."
If you receive a pre-determined allowance from your employer to cover a company car's operating expenses, you do not have to include this sum in your income as long as it is based solely on distance driven for work purposes. This allowance must not exceed a level set each year by the tax authorities.
