As a small business owner, vehicle write-offs can be one of the best ways to reduce your taxes. It is also one of the easiest targets for a CRA auditor.
So you don't get caught uninformed we've outlined the most common vehicle tax traps to watch out for.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.
Tracking your vehicle expenses & mileage sucks.
It is a lot of work.
It’s annoying.
It’s even painful.
And you are BUSY business owner. So why should you bother?
Because it is one of the best ways to protect yourself from a motor vehicle audit.
I hope that by the end of this article you will feel confident in protecting yourself and your small business from CRA audits and will implement some of these tips into your busy life.
Do you really need an automobile logbook?
This is a question my father would ask every time he was writing (by hand) in his tiny little notebook at the end of his drive with two little kids squirming and crying in the backseat.
At the end of every drive, before we could even open a car door, he would document his business or personal kilometres.
We all hated this ritual, but my father was very grateful for it when he was audited, not once, but twice, by the CRA.
Tracking your kilometres (although annoying) is a great way to ensure business, self-employment, contracting, rental property or employment driving is a tax write-off.
Without a vehicle logbook, the CRA can deny vehicle expenses and often do as this is a common area to audit.
There is an exception: if your vehicle is used 100% for business purposes you do not need to keep a logbook.
Traveling to and from the same location on a consistent and regular basis is considered personal commuting and is not tax deductible. These trips are deemed personal driving and should not be recorded in your logbook. If you aren't sure, use your judgment based on your situation.
Although it is a lot of work... a mileage logbook is the best way to protect yourself against motor vehicle audits.
My father’s diligence saved him from a big tax bill those two times he was audited.
Do you really need to keep your vehicle receipts?
This is a question my friend would ask every time she opened her glove compartment.
It was stuffed with gas receipts. Crinkled, smooshed and chock full.
She would quickly open up the compartment, shove in a new receipt and then slam it closed! The extra force helping to close the latch on the overfull compartment.
Keeping (and later adding up) all your gas, repair, maintenance, licensing, and insurance receipts can be aggravating and at times embarrassing when your friend, who is an accountant, happens to notice your glove compartment.
Before you get underway consider if you need to keep those receipts in the first place.
Business Type | Vehicle Registration* | Keep Receipts? |
Sole Proprietorship** | Your Personal Name | Yes |
Non-Incorporated Partnership | Your Personal Name | Yes |
Incorporation | Your Personal Name | No*** |
Incorporation | Your Corporation's Name | Yes |
*Vehicle Registration: Whose name is on the ownership papers or lease documents?
**Sole-proprietorship: includes non-incorporated businesses, self-employed individuals, contractors, personally held rental property owners, and employees.
Non-incorporated businesses do not have the option of claiming mileage despite what people say. While doing the taxes for many, many clients – we’ve had to give them the bad news. Non-incorporated businesses can't claim mileage. Many clients are given incorrect information by well-meaning acquittances. Don’t get caught in this trap.
***No Receipts: If you have a corporation but your vehicle is in your personal name, only mileage can be claimed. Your vehicle expenses (gas, repairs, insurance, etc.) should be paid personally and are not a tax deduction. See below for more info.
If you need to keep your motor vehicle receipts, be sure to keep all of them.
Gas, repair, maintenance, insurance, licensing, leasing costs, and loan interest can all be written off.
Keep both your ‘personal’ and ‘business’ receipts because at the end of the year a deductible portion will be calculated.
Many clients will just keep the ‘business’ portion and they lose out on deductions come tax time
"While doing the taxes for many, many clients – we’ve had to give them the bad news. Non-incorporated businesses can't claim mileage."– Jillian Battaglio, CPA, CA
Should your corporation really own your vehicle?
If you use your vehicle at least 90% of the time for business purposes, consider having the vehicle owned by the corporation.
Why does this matter?
A client whose truck was 100% business use got denied by the CRA because rather than being in the corporation’s name – the truck was registered in their personal name.
This sucked and cost them a lot of money in extra taxes.
Writing off gas, repairs, insurance, leasing fees, and loan interest in a corporation can have a higher write-off than claiming mileage but only if you are driving almost exclusively for business purposes.
If you drive less than 90% for business, it is best to keep the vehicle in your personal name as negative tax consequences (called a standby charge) can arise and you may end up paying more tax overall.
Some of our clients have paid thousands of extra tax dollars because their very expensive vehicles were used only marginally for business use – but registered to their corporations. This meant they paid significantly more taxes than they had to.
GST / PST / other taxes can arise on vehicle transfers. Here are a few things to keep in mind:
To ensure you'll benefit in the long run only transfer vehicles used at least 90% for business purposes into your corporation.
Purchasing a business or incorporating a sole proprietorship? Consider a GST44 form to avoid GST: HERE.
Do you live in British Columbia? An exception to PST on vehicle transfers is available: HERE.
The biggest thing to keep in mind is usage.
If you use your vehicle at least 90% of the time for business purposes then consider having the vehicle owned by the corporation. If not, keep it in your personal name.
How to really keep a mileage logbook.
My father’s solution to this question was to write down every business trip in a tiny little mileage logbook he bought at an office supply store.
Now… my father, whom I adore, has atrocious writing – and honestly – squishing numbers into a 5 x 5 notebook didn’t help. But! He was extremely grateful for his labour when he was audited not once – BUT twice by the CRA for his motor vehicle usage.
Step 1: Record Your Basic Vehicle Information.
The year, make, model, and purchase date identifies the vehicle you are driving.
It also helps with additional tax deductions such as depreciation.
If you are keeping vehicle receipts (see above) each vehicle needs its own logbook, and vehicle receipts should be separated.
Next, head out to your vehicle and look at the odometer on your dashboard.
The odometer tells you the total kilometres your vehicle has travelled. Record this number and the date you took the reading.
If you missed this step when you first started to drive for business purposes, don’t despair, many of our clients have. Consider reviewing mechanical invoices. Service invoices like an oil change receipt often have the vehicle's odometer reading recorded.
You will want to record your odometer reading at the end of your tax year (December 31st or your corporate year end date). This date can fly by so leave a reminder in your calendar. We’ve had many bashful clients provide a “year-end date” sometime in March… the date then remembered.
Step 2: Track Your Driving
Once your logbook is set up with your basic vehicle information you are ready to begin recording your tax-deductible driving.
It's best to do this daily for maximum benefits.
Deductible trips can include:
Travelling to see customers
Picking up or transporting supplies
Visiting your accountant
Travelling to a work conference
Etc.
Avoid recording personal trips like grocery store visits or personal lunch outings.
Each day you travel record:
The purpose of each trip
Your starting address
Where you travelled too
The total kilometres driven for business purposes.
Use Google Maps if you need more information. All these items are important (and yes also annoying) to capture and can save you during an audit.
What if you really hate paperwork?
Now I know, logbooks and keeping receipts is annoying.
Absolutely!
My dad recorded his mileage logbook with two squirming kids in the backseat. But they are the #1 thing separating you from CRA auditors.
I hope this information has helped you feel confident about claiming your motor vehicle usage for tax purposes. Taxes are complicated but my goal is to make them easier for you to implement in your busy life.
If this topic has interested you, be sure to check out our other blog articles and consider subscribing to one of our membership plans so you can be a well-informed business owner.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.