As the prices at the pump continue to increase, it’s important that you understand the tax deductions that you or your business may be entitled to claim for automobile expenses. This blog post summarizes some of the considerations for employees and self-employed or incorporated individuals.
As an employee, in certain situations you may be able to claim a deduction for automobile expenses incurred. If you are required to drive as part of your employment duties, and do not receive what the Canada Revenue Agency (“CRA”) considers a “reasonable” allowance from your employer, you would be entitled to claim a deduction for automobile expenses incurred. If you do receive a reasonable allowance from your employer, this amount would not be included in your income, and you would not be entitled to claim any deductions. However, if you receive no allowance or an allowance that is higher or lower than the prescribed per kilometer rate, which would be included on your T4, you would be entitled to claim a deduction for the actual automobile expenses incurred. Driving to and from home to your regular place of employment does not count – rather, driving to and from a client or a vendor would be considered deductible.
In order to make your claim, your employer would need to sign Form T2200 – Declaration of Conditions of Employment, indicating that you either did not receive an allowance, or that you did receive an allowance but it was included as wages on your T4. The best way to keep track of the mileage incurred as part of your employment duties is to keep a detailed log, which the CRA may request to examine. You would also need to retain copies of all your automobile receipts and keep track of your vehicle’s total mileage during the year in order to pro-rate the portion used in your employment duties.
Self-Employed or Incorporated
As a self-employed individual or an incorporated business, there are opportunities to deduct automobile expenses incurred for the purpose of earning business income. Allowances or reimbursements paid to sub-contractors or employees would be deductible for tax purposes. Furthermore, certain automobile expenses for vehicles owned by the business may also be claimed, such as fuel, repairs and maintenance, insurance, license and registration fees, interest paid on loans to purchase the vehicle, eligible leasing costs, and/or depreciation. It is important to speak with your tax advisor before determining whether a vehicle should be purchased by the business or not, in order to avoid potential negative tax implications.
In addition, even if a vehicle is owned by the business, only the portion of the expenses incurred for the purpose of generating business income can be claimed as a deduction for tax purposes. You must keep all receipts, maintain a detailed automobile log, and keep track of the vehicle’s mileage.
For more information on how best to deduct automobile expenses, please contact your DMCL tax advisor.