Personally owned vehicles used for business travel can offer a great way to earn tax free money while getting a business deduction. CRA specifies a specific allowance rate a business can pay the individual. The CRA prescribed allowance is a business deduction to the business and a tax-free receipt to the individual. The allowance rate is a set amount, no matter the actual operating costs of the vehicle.

As these issues are complex and taxpayers should consult with their tax accountant, preferably one that has a CPA (Chartered Professional Accountants) or CA (Chartered Accountants) designation. Our CPA – CA accounting firm based in Edmonton are highly experienced in income tax matters and would be pleased to assist in your personal or business tax matters.

To remain a tax-free allowance to the individual, the amount must be reasonable, measured solely by kilometers, and not supported by any other reimbursements. Examples where the allowance is NOT tax-free include:

  1. Amounts paid in excess of the CRA prescribed per kilometer allowance rate unless the amount is “reasonable”. If the circumstances indicate that a higher per kilometer rate is “reasonable” and is supportable, CRA will allow the amount to be tax-free to the individual. However, the excess will NOT be deductible by the business.
  2. Monthly allowances not based on kilometers travelled. For example, a set $500 per month.
  3. A combination of a per kilometer allowance rate and a reimbursement of actual expenses.
  4. A combination of per kilometer allowance rate and a monthly allowance not based on kilometers travelled.

If the allowance is not tax-free, the recipient must include the total amounts paid by the business in employment income. The recipient may then deduct reasonable expenses on this income based on the operating costs of the vehicle and the kilometers driven. This requires the recipient to track all mileage through a log and track all operating expenses of the vehicle. Failure to keep a log or estimating the actual operating expenses can result in CRA overturning the deduction and replacing it with their own estimate which may not be favorable to the taxpayer.

If you are claiming automobile expenses relating to the use of your vehicle at work, you must maintain a log book indicating the total kilometers you drove in the year and the kilometers you drove to earn employment income. The log book should also contain the date, destination, and the distance traveled for each trip. Make sure that you record the odometer reading of the vehicle at the beginning and end of each year.

Here is a great tax tip. Use a vehicle with low operating costs for business travel and ensure the amount paid qualifies as a tax-free allowance. Often, in these circumstances, the allowance rate will exceed the actual operating and depreciation costs of these types of vehicles. The difference between the allowance rate and the actual operating cost rate is a non-taxable receipt to the individual and the business can still deduct the full amount paid to the individual.

Another great tip to consider is when a taxpayer calculates that the CRA per kilometer rate is not adequate to cover the operating costs and wishes the business to reimburse actual expenses.

As these issues are complex and taxpayers should consult with their tax accountant, preferably one that has a CPA (Chartered Professional Accountants) or CA (Chartered Accountants) designation. Our CPA – CA accounting firm based in Edmonton are highly experienced in income tax matters and would be pleased to assist in your personal or business tax matters.

ANDERSONBRONSCH TEAM
ROMANOVSKY & ASSOCIATES LLP
CHARTERED PROFESSIONAL ACCOUNTANTS


Keith M.J. Anderson* BCom, CPA, CA-IT, CITP

Chartered Professional Accountant and Chartered Accountant (Canada)
CA-Designated Information Technology Specialist (Canada)
Certified Information Technology Professional (US)
* Professional Corporation

Web: www.AlbertaCPA.com
Email: keith@albertacpa.com
Phone: 780 447 5830
Fax: 780 451 6291
Cell: 780 906 2223

Disclaimer:
This information is provided for general information purposes only. As legislation changes frequently, certain information may be out of date periodically. The complexity of the Law and the varied circumstances of each taxpayer dictates that the information provided may not be suitable in all circumstances. Readers must not rely on any information provided without first obtaining direct and competent professional advice. The information provided is not intended to replace or serve as substitute for any audit, advisory, tax or other professional advice, consultation or service. Therefore, the information is provided “as is” without warranties of any kind, express or implied, including accuracy, timeliness and completeness. In no event shall and associated parties to this information be liable for any direct, indirect, incidental, special, exemplary, punitive, consequential or other damages whatsoever.

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