Most cars, some pick-up trucks, and vans that seat up to eight passengers and one driver are considered passenger vehicles.

Deductible expenses include licence and registration fees, payments for fuel, insurance, interest for financing, leasing costs, capital cost allowance (CCA), maintenance, and repairs. If you use your car for both business or employment and personal use, the expenses are prorated according to your use of the vehicle for business or employment purposes. There are further restrictions on the deductions for CCA, interest and leases for passenger vehicles owned by a company or used for business purposes.

Personal Use of a Company-owned Vehicle

If you are an employee and your employer provides you with a vehicle, the taxable benefit for your personal use of the car is generally the total of two amounts: a standby charge for the year and an operating cost benefit for the year.

The taxable benefit for the operating costs relating to your personal use of the vehicle is 20 cents/kilometre. If you are employed principally in selling or leasing automobiles, the taxable benefit for your personal use of the vehicle is 17 cents/kilometre.

If, as the owner/manager of an incorporated business, you use a car belonging to the corporation, or a person related to the corporation, you are also required to include a standby charge in your income. The value of this taxable benefit is calculated the same way it is calculated for other employees. The formula is 2% per month times the original cost of the automobile including GST, or two-thirds of the monthly lease cost, including taxes but excluding insurance.

Employee Automobile Allowances

If you are an employee and your employer provides you with a non-taxable car allowance for the business use of your own car and the amount is reasonable, this car allowance is not included in your taxable income. In order for an allowance to be considered reasonable, it must directly relate to the number of business kilometres driven in a year.

A car allowance is not considered reasonable if you receive specific reimbursements for direct costs (other than supplementary business insurance and toll or ferry charges) and/or the allowance does not approximate your cost of operating the vehicle. If the car allowance is not reasonable, it is included in your income and you are entitled to deduct the portion of the automobile costs directly related to employment use.

If your employer does not reimburse you for the business use of your car or you do not receive a not-taxable car expense allowance, your car expenses are deductible from income in proportion to the business use of the car. To claim these expenses, you will need to have your employer complete and sign Form T2200 (Declaration of Conditions of Employment) confirming you are required to use your car for employment purposes. While you do not have to file this form with your income tax return, you should keep it with your records in case the CRA wants to see it.

Talk to your chartered accountant to determine which form of allowance or reimbursement is most advantageous in your circumstances.

CCA

For income tax purposes, the maximum amount on which capital cost allowance may be claimed for a passenger vehicle is $30,000 plus PST and GST/HST. This amount also applies to the maximum GST/HST input tax credit (ITC) that can be claimed for the purchase of an automobile. Thus, if the cost of the automobile is $40,000, the GST ITC is based on the $30,000 amount, i.e., $2,100.

Lease Deductibility

If you lease a passenger vehicle, the maximum monthly deduction is $800 plus PST and GST/HST. The GST ITC is limited to 7% of the lease charge up to the monthly maximum of $800; i.e., the ITC maximum is $56/month.

Automobile Log

If you are using a car for work or business, be sure to keep detailed records to support the kilometres driven for business purposes. An automobile log is an efficient way to keep accurate records of your trips for personal and business purposes and the related expenses.

At the beginning and end of each taxation year, record the odometer readings. If you change vehicles during the year, record the odometer readings at that point as well.

Keep the log in your car as a daily reminder to:

• Document the date, destination, purpose and total kilometres driven for each business trip.
• Write down car expenses, such as gas, oil, car washes and other maintenance. If the log has a pocket, store your receipts there until the end of the month. Each month, be sure to file these receipts, as they will be useful for budgeting purposes. Where these are allowable business expenses, you will need these receipts for the preparation of your personal income tax return.
• Calculate the total kilometres driven for personal and business purposes. Tallying these two categories each month makes it easy to determine the breakdown at year-end, whether this relates to a taxable benefit or an allowable deduction for business expenses.

Take Time to Plan

The CRA has strict requirements for claiming automobile deductions that are related to the business use of a vehicle. Some of the rules for determining the amounts that can be claimed are complex. In addition, there may be specific rules that apply to your particular situation that could be advantageous. Be sure to talk to your chartered accountant to determine the impact on your tax planning for 2005.