If you are an incorporated small business owner and you use a vehicle as part of your business operations, here are a few things you should know before claiming the related expenses:
A Personal Owned Vehicle
For small business owners who only have one vehicle, or who wish to use their personal vehicle for business purposes, claiming a mileage expense in the corporation based on the Department of Finance tax-exempt allowance rates is a good way to reimburse themselves for the portion of vehicle operating and maintenance costs attributed to the business use portion. For owners wishing to take this approach, it is important to keep in mind that the actual costs incurred in relation to the personally owned vehicle will not be treated as a deductible expense to the corporation as the allowable mileage rates are intended to serve as the maximum allowable deduction in relation to business use of a personal vehicle. Any personal vehicle expenses paid for by the corporation during the year should be either reimbursed by the shareholder, or recorded as a debit to the Shareholder Loan account (funds owed back to the corporation).
The Department of Finance sets specific income tax deduction limits and expense benefit rates that apply when using an automobile for business purposes. The limit on the deduction of tax-exempt allowances paid by an employer to an employee, who uses a personal vehicle for business purposes, is set at 68 cents per kilometer for the first 5,000 kilometers (increased from 61 cents in 2022), and 62 cents for each additional kilometer (increased from 55 cents in 2022). Visit https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/automobile/automobile-motor-vehicle-allowances/automobile-allowance-rates.html for more information.
A Corporate Owned Vehicle
Where a vehicle being used for business is owned by a corporation, the tax treatment for vehicle expenses is different from where the vehicle is owned personally in that the corporation will have the ability to deduct actual expenses incurred, instead of claiming a vehicle allowance based on the prescribed per kilometer rate. This approach makes sense in cases where an owner-manager has their own separate vehicle for personal use, and utilizes a corporate owned vehicle for business use only (any personal use is negligible).
While there would not be a mileage allowance expenses claimed in relation to corporate owned vehicles, a need to monitor and track business usage still exists as personal use of a corporate owned vehicle by an employee or shareholder of the corporation can result in a taxable benefit. The following types of benefits can arise where a corporate owned or leased vehicle is made available for personal use:
Standby Charge – A taxable benefit calculated based on the cost of the vehicle (purchase cost or lease costs) made available to an employee and the number of days during the year that the vehicle was made available. The benefit is reduced by any costs reimbursed by the employee.
Operating Expense Benefit – A taxable benefit which arises where a vehicle is provided to an employee and the corporation pays for expenses related to the personal use of the vehicle. The operating expense benefit can be calculated based on the fixed rate of 33 cents (including GST/HST and PST) per kilometer of personal use (30 cents per kilometer for taxpayers employed principally in selling or leasing automobiles) or if certain criteria are met, 50% of the standby charge for the year (before deducting reimbursements).
The following limits are also applicable to the deduction of costs related to corporate-owned vehicles:
- The ceiling on the capital cost of passenger vehicles for capital cost allowance (CCA) purposes (starting Jan 1, 2023) is set at $36,000 (plus applicable federal and provincial-territorial sales taxes) for non-zero-emission passenger vehicles, and at $61,000 (plus applicable federal and provincial-territorial sales taxes) for eligible zero-emission passenger vehicles. These ceilings restrict the cost of a vehicle on which CCA may be claimed for business purposes.
- The maximum allowable interest deduction for amounts borrowed to purchase an automobile is set at $300 per month for loans related to vehicles acquired after 2019.
- The limit on deductible leasing costs for 2023 is set at $950 per month (plus applicable federal and provincial-territorial sales taxes) – increased from $900 for 2022. A separate restriction prorates deductible lease costs where the value of the vehicle exceeds the capital cost ceiling of $36,000. Both of them restrict the deduction of automobile lease payments.
The deduction of mileage and other vehicles expenses is an area that has been under significant scrutiny from the CRA. For any business owner claiming either a mileage expense for the business use of a personal vehicle, or vehicle expenses relating to corporate owned vehicles, it is important to be aware of the supporting documentation that will need to be retained in the event of a CRA review or audit.
To support the use of a vehicle, CRA requires an accurate logbook of business travel maintained for the entire year, showing for each business trip, the destination, the reason for the trip and the distance covered. Specifically, for each business trip, keep a log listing the following:
- number of kilometres you drive
CRA also require the odometer reading of each vehicle at the start and end of the fiscal period. If you change motor vehicles during the fiscal period, record the dates of the changes and the odometer reading when you buy, sell, or trade the vehicle.
For detail, please visit CRA website at https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses/motor-vehicle-expenses/motor-vehicle-records.html