Besides the possibility of a tax-free allowance, another possibility exists to reimburse employees or shareholders for business use of personally owned or leased vehicles.
If the employer is flexible and it appears that the CRA prescribed automobile tax-free allowance rate is not adequate to cover actual operating costs incurred by the individual, taxpayers can argue that the business can reimburse actual operating costs which can be tax-free to the recipient and tax-deductible to the business.
Reimbursements can be argued to not be allowances and therefore are non-taxable receipts. At issue is how to measure the reimbursement and the reasonableness of the actual expenses incurred by the individual. This would require a very specific and detailed calculation and which must be supportable with receipts and a detailed mileage log kept by the individual. If you are claiming automobile expenses relating to the use of your vehicle at work, you must maintain a log book indicating the total kilometers you drove in the year and the kilometers you drove to earn employment income. The logbook should also contain the date, destination, and distance traveled for each trip. Make sure that you record the odometer reading of the vehicle at the beginning and end of each year.
For leased vehicles, this option allows the lease costs to be included in the calculation of operating costs to be reimbursed. However, for vehicles that are owned, depreciation on the cost of the vehicle may not qualify as an operating cost and may not, therefore, be a reimbursable cost. Failure to document properly the mileage and costs incurred may result in CRA disallowing some or all of the tax-free status and including some or all of the amounts paid into the individual’s income. To the extent that the amounts are considered tax-free, the recipient receives the amount tax-free and the payor business may deduct the full amount paid.
As these issues are complex and taxpayers should consult with their professional tax accountant. The Filing Taxes team is highly experienced in income tax matters and would be pleased to assist in your personal or business tax matters.
If you need any advice on tax-saving strategies from an expert tax accountant in Toronto, Mississauga, Oakville, and Hamilton feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step towards proper management of your finances.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.