Keep your Eyes on the Road – Enhanced CRA Activity for Vehicle Expenses
It is our understanding that there have been observations of enhanced “activity” by the Canada Revenue Agency (CRA) in relation to claims for deductions of vehicle expenses. Specifically, we have observed that the CRA is conducting more “line” audits, in cases where any vehicle expense is reported to the CRA, as has previously been observed for travel expenses and professional fees.
As such, we felt it would be useful to remind you of the criteria that you are required to adhere to in order to ensure that any claims for vehicle expenses withstand a CRA challenge.
Vehicle expenses incurred to earn employment income can be claimed as Employment Expenses on your personal income tax return. They can also be claimed as a deduction against self-employment income earned, or within a corporation as a deductible vehicle expense.
In each case, the deductible amount includes the business portion of the vehicle costs incurred, including gas, repairs and maintenance, insurance, loan interest and tax depreciation (capital cost allowance) or leasing costs, both of which are subject to limitations.
The business portion of the costs is calculated based on the number of kilometers driven for business purposes divided by the total number of kilometers driven in the year.
The number of kilometers driven for business purposes includes kilometers between your place of business (which is your home in the case of a home-based business) and a business destination such as a client’s premises (or other acceptable destinations such as the airport, a client prospect, or a venue where a business function is held). The number of kilometers will always be the lesser of the distance between your home and the business destination, and your place of business and the business destination.
Kilometers driven from your home to your place of business (or place of employment) and back are excluded. Caution also needs to be applied when driving from a home office to a principal work location, even when self-employed or conducting business within a corporation, as CRA generally views this as being personal.
The CRA explicitly requires you to maintain a log (in paper or electronic format) in which your kilometers driven for business purposes are documented in detail, including the date, the business destination, the purpose of the trip, and the mileage before and after the travel. The CRA also allows for the use of a Simplified Method, if certain criteria are met.
In the absence of a formal detailed log, any vehicle expenses claimed as a deduction will be automatically denied.
Finally, It is important to remember that there is no such thing as a “reasonable” claim for vehicle expenses. For example, an 80% business use may be completely reasonable to one, while a 20% business use may be excessive for another. The business use percentage is a matter of corroborated facts, and the notion of reasonableness does not factor in.
Should you have any questions pertaining to your vehicle expenses, please do not hesitate to contact us.