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You can deduct a lot for valid automobile expenses, but you’ll need to keep a detailed record of your travels.
One of the most vexatious—and most audited—provisions on your income tax return is the claim for automobile expenses. Why? Keeping an auto log is necessary to identify the personal versus business use of the vehicle, if you use it for both purposes. Here’s how to be ready for that inevitable day when a Canada Revenue Agency (CRA) request for justification comes along.
Self-employed individuals who file a T1 return as proprietors or unincorporated business owners, employees who negotiate contracts on behalf of their employers, and employed commissioned salespeople can claim a deduction for auto expenses.
The self-employed use Form T2125 Statement of Business or Professional Activities to claim automobile expenses. Employees, including commissioned salespeople, will need two forms:
Auto expenses may include the costs of filling up at the pump, plus maintenance and repair costs like oil changes, restoring brakes and other auto parts. Also claimable are the costs of insurance, licence and registration fees. Certain costs are restricted to maximum claim amounts: monthly interest charges, leases and capital cost allowance, for example.
In all cases, you have to account for “mixed use”—the kilometres driven for employment or business use, compared with the driving distance for personal use. Importantly, driving to and from your place of work is considered to be personal.
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Have a consistent method of distinguishing business trips from personal trips, and start right away if you haven’t done this in the past. The CRA will look at a reasonable record of your driving in determining whether to accept a claim from the past. Also, if you have a detailed calendar and Google Maps handy, it’s easy to recreate the distance driven for personal and employment/business driving from these records. Some tips and traps:
Tax tips: Save all receipts and mark any unreceipted items in your auto log—even if that’s an electronic log. This includes parking costs, for example. The expenses are first totalled using the actual receipts and the log of cash expenditures like car washes or parking meters. Then the total amount of the expenses are prorated by a formula: the portion of business/employment kilometres driven over the total kilometres driven in the year.
Note that only business parking expenses can be claimed in full; other costs must be prorated. No “cents-per-kilometre” claims are allowed for the auto expense deduction (although this is possible when claiming other provisions like medical expenses or moving deductions).
The distance log: This, of course, is the hardest part and is often considered to be a “tax trap” come audit time. The onus of proof is on the taxpayer, so this must be embraced if you expect your deductions to be allowed.
To begin, don’t forget to write down the odometer reading at the start and end of each fiscal period. For most people, that’s January 1 and December 31. In between, record accurately the details for each employment business trip, including the date, the destination, the reason for the trip and the distance covered. Good news: you can keep a “simplified” or “detailed” log book.
Tax traps: Driving from home to work is considered to be a personal expense, even if the trip is outside of normal work hours. However, there are a few exceptions to consider and record:
Similarly, if you are required to drive directly from a work location other than your normal work location (for example, after attending a conference or meeting, or after running an errand for your employer), then the entire trip is considered to be for employment business and not personal purposes.
Keep a separate log for each automobile to show the breakdown between the total kilometres driven compared to the business kilometres. Account for (and keep receipts for) each auto’s expenses separately.
Your tax records must be retained for a period of six years from the end of the tax year to which they relate. In the case of the auto log book, there is an important additional nuance: it must be retained for the full 12-month period from the end of the tax year for which it is last used to establish business use.
In conclusion, claiming auto expenses can pay off handsomely when detailed auto logs result in higher deduction claims. However, proper reporting is essential when the tax auditor comes knocking after tax season ends.
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