Ok, let’s tackle vehicle expenses. In practice, we constantly see misconceptions, vehicles be handled incorrectly, missing deductions and so much more. The problem? This is a pretty robust area of tax, as CRA understands that vehicles are needed for business, but there can be a personal component as well. This becomes complicated. And it changes depending on whether a vehicle is owned, leased, in a corporate setting or sole proprietorship (unincorporated business) and what type of vehicle it is. Even how many seats can make a difference in some cases.
We’re going to start simple, and start with a personal vehicle owned by an individual and used for business purposes in a sole proprietorship.
So let’s say Captain Superdude has a car he owns (4 doors, purchased for $15,000 used) and uses in his painting business. He will drive from home to his office, then from his office to customer sites to paint. Because he is using his vehicle in his business, he can take a deduction. But what does he get and how does he do it?
Deduction for the cost of his vehicle
Supe paid $15,000 for vehicle this year, we know what the fair value is. It’s a 4-door car, so it is considered a passenger vehicle by CRA. This means if it were over $30,000, there would be additional tax considerations (will talk about later on).
He can add the car to take tax depreciation on it on his tax return. It would be included in “Class 10” and subject to a deduction of 30% per year.
Expenses incurred to run his vehicle
Supe pays for insurance, gas, car washes, maintenance, and registration every year. These costs add value to his business, because he is using the car to earn money, so he can deduct them from his profits.
But wait, McRally? Can he really deduct it all? What about that personal component you mentioned above?
The answer is no – Supe’s deduction is limited to the amount he drove his car for business. This means Supe needs to do two things. Every January 1st, he takes an odometer reading because he needs to know the total kms he drove in a year. He also needs to know how much he drove for business vs. personal. The easiest way to do this is a GPS enabled mileage tracking app on his phone, such as MileIQ or Vezma.
Once he knows that, he can enter that on his tax return and his expenses will be prorated for only the business portion.
So what is business use? In this case, Supe drives from home to the office and the office to clients (and back). Trips from the office to the client are business because he needs to take his vehicle there to earn money. Trips from the office to home, however, are not. CRA has long established that your commute is personal time and therefore not deductible.
And remember! This is just for the above scenario. Call a pro for more details on your situation, as your facts and circumstances may change the analysis. Also, don’t take these rules if you’re using a personal vehicle for corporate business. We’ll talk about that on the next BATT.