Owner-managers should discuss Canada Revenue Agency (CRA) changes to employee vehicle allowances with their CPAs before announcing any changes to company policy.
To keep up with the rising costs of operating vehicles, Revenue Canada has increased the maximum tax-exempt car allowance deductible for employees to 55 cents per kilometre for the first 5,000 kilometres, and to 49 cents per kilometre for distances travelled in excess of 5,000 kilometres.
If you live in the Northwest Territories, Nunavut or the Yukon, the per-kilometre rate has increased to 59 cents for the first 5,000 kilometres and to 53 cents for distances exceeding 5,000 kilometres.
The rates and application are based on a calendar year. As can be expected, any employee claim for the exemption must be supported by documentation. Employees must keep a travel log for each vehicle indicating:
Starting point of business trip;
Purpose of the trip;
Vehicle starting kilometres;
Vehicle ending kilometres;
Expense reports should be submitted monthly. Management should enforce a policy that travel costs will only be reimbursed after the expense reports are received.
Use of Personal Vehicle
Because employees and owner-managers alike also use their personal vehicles for business trips, it is important to record the January 1 odometer reading and the December 31 odometer reading of each personal vehicle that may be used for business.
The purpose of the car allowance is to cover all expenses relating to the operation of a vehicle. These expenses include:
Maintenance and repairs;
Fuel, including gas, oil and propane, and charging cost;
Registration and licence fees;
Capital cost allowances (a percentage of the cost of the vehicle allowed by the CRA to be offset against revenue as an expense);
Interest costs paid on any loan used to buy the vehicle.
None of these expenses should be submitted to the employer if the employees are receiving a vehicle allowance. The allowance paid is not taxable in the hands of the employee only if:
The allowance is based on the number of kilometres driven for business purposes
The rate per kilometre is reasonable
None of the above expenses was reimbursed by the employer.
Allowance Less Than Vehicle Expenses
Sometimes, the allowance paid may be less than the vehicle expenses incurred by the employee while working. In some circumstances, the employees do not get reimbursed for their employment-related expenses at all. If so, employees may claim their out-of-pocket expenses on their personal tax returns.
In order to claim these expenses, the employees should retain copies of the expense reports submitted for the year as well as all the vehicle expenses incurred during the year. They may wish to categorize them into specific expenses as outlined under “Calculation of allowable motor vehicle expenses” within the CRA form T777. If more than one vehicle is used, a detailed record of expenses should be maintained for each vehicle.
Additionally, the employees must obtain a T2200 Declaration of Condition of Employment form to be prepared and signed by the management. This form provides important information about the conditions of employment including:
Whether an employee was required to pay their own expenses while carrying out the duties of employment;
Whether the employee was required to travel away from the employer’s place of business in the normal course of employment;
Whether the employee received any fixed allowance or per-kilometre reimbursement;
The amounts of allowances/reimbursements received and whether such amounts were included in the employee’s T4 slip.
The employees are able to deduct vehicle expenses on their personal tax returns only to the extent they did not receive sufficient allowance/reimbursements from the employer. Also, they can deduct expenses, even if they received sufficient allowance from the employer, if such allowance was included in their T4 income. Because the deductibility of employment expenses is dependent on each employee’s unique terms of employment, the T2200 form must be completed for anyone hoping to claim employment expenses. The CRA then uses this information to analyze which expenses are deductible.
"Place of work" may soon include off-premises job sites.
Changing Definition of "Place of Work"
Kilometres driven from residence to workplace or office (i.e., home base for use of the vehicle for work) are considered "personal" expenses, not reimbursable costs. Recent changes to tax rules further extend the definition of “place of work” itself to include job sites (i.e., off-premises work places). For instance, if an employee is driving directly from home to a job site such as a construction project (i.e., place of work) on a daily basis for an extended period, that construction site may be considered “home base” and as such, travel to that site would not be considered a reimbursable expense.
HST / ITC
If employees do not receive a vehicle allowance but remit receipts for reimbursement, a business is allowed to reimburse the expense and offset the HST charged on the submitted receipt against the HST collected on sales. Similarly, when employees submit the car allowance expense report, a business should carve out the HST amount and claim it as an input tax credit (ITC). The ability to offset HST collected with ITCs from car allowances paid is another reason for employers to ensure employees submit expense reports on a timely basis.
No Change Since 2001
Despite the increase in the cost of vehicles over the last few years, the allowable ceiling costs for vehicle purchases, leases and interest have not risen accordingly. Unfortunately for the taxpayer, the vehicle cost ceiling has remained at $30,000, the lease cost ceiling at $800 per month, and the interest cost ceiling at $10 per month since January 1, 2001.
Article first appeared in CPA Canada’s “Business Matters” Newsletters and has been republished with permission of the copyright holder.