Whether you own a business or are an employee, if you use a vehicle for business it’s important to know how the taxes work – and how you can minimize the amount of taxes you pay.
Related: Common Tax Myths
Using a Company Vehicle
If you are an employee and you use your company’s vehicle for business, there are 2 charges involved:
This is 2% of the original cost of the vehicle for each month that it is available for you to use. If the vehicle is leased, the charge is 2/3 of the monthly lease cost.
The charge can be reduced if the business use of the vehicle is more than 50% and the personal use is less than 20,000km per year. If both these conditions are met, your employer is allowed to reduce the standby charge using the following formula:
Personal use km/20,000km
As an example: If you drive a company vehicle 12,000km for personal use and 24,000km for business use, the standby charge can be reduced by 50% (12,000/24,000). This is assuming the vehicle was available for your use the entire year. If not, it gets reduced even further.
If you take 3 weeks of vacation per year (or more), you should leave the company vehicle at the office because it won’t be considered “available” for your use during that time.
It is important that the company have control of the vehicle while you are on vacation and not you. If CRA deems you to have ‘control’ then you won’t get the reduced charge.
Operating Cost Benefit
This is a taxable benefit equal to 26 cents per km of personal use driven. If your employer pays any operating costs on your behalf related to personal use and you do not reimburse them, the benefit still applies.
The alternative to this calculation is if business use is higher than 50%. In this case the operating benefit is a flat 50% of the standby charge. If you wanted to use this option you’d need to notify your employer in writing by December 31.
Things get tricky if an employer only pays a portion of the costs.
You are at a disadvantage if the taxes related to the operating cost benefit are higher than the amount the employer pays.
Let’s say your employer pays the insurance only ($900 annually) and you drive the vehicle for 20,000 km of personal use.
The operating cost benefit is: 20,000 km x 26 cents = $5,200. At a tax rate of 40% this would cost you $2,080. In this case you are better off to pay back the $900 insurance costs to your employer before February 14 to make sure you don’t get hit with an operating cost benefit.
How to Reduce Your Taxes
You can reduce the taxable benefit you receive by reducing the amount of time your vehicle is available for personal use, checking to see if you qualify for a reduced standby charge (see conditions above).
You also need to figure out if the taxes on the operating cost benefit are higher than the amount your employer pays – if they are, you are at a disadvantage and can save by paying back your employer for the portion they paid for.
Using Your Own Vehicle for Your Business
If you use your own vehicle for business and don’t receive a reasonable allowance by your employer based on the business usage of the vehicle, you are allowed to deduct a portion of the vehicle expenses from your employment income. To do this, your employer would need to fill out a T2200 form from CRA.
You can deduct the following costs: fuel, repairs, car washes, capital cost allowance (depreciation) and interest on a car loan – to the extent that the expenses relate to your employment.
The calculation for CCA (depreciation) can be tricky and these costs are considered a grey area, so it’s best to seek professional advice if you use your vehicle for business purposes and don’t receive a vehicle allowance from your employer.
On the other hand, if you do get reimbursed by your employer for the business use of your vehicle, the reimbursement payments aren’t taxed and you can’t deduct them from your income.
Using a Vehicle When Self-Employed
If you are self-employed and use vehicle for work, you can normally deduct the portion of your vehicle expenses that relate to business use (based on mileage driven in the year).
As an example, if I owned my own business and drove a vehicle that was 50% related to business use, I could deduct 50% of my vehicle expenses. This could include fuel, car washes, repairs, insurance, interest on a car loan, leasing costs (if leased) and depreciation (if owned).
Depreciation is limited to a maximum purchase price of $30,000 and leasing costs are limited to $800. The interest on a car loan is limited to $300.
How to Reduce Your Taxes
If you are self-employed and drive a vehicle as part of your work, the key is to maximize the business use and minimize the personal use.
Maximizing the business use will ensure you can deduct a higher percentage of the total mileage driven in the year.
Tips to Remember:
- Whether you use a company vehicle or a vehicle related to your own business, keep a log of what mileage you travelled and whether it relates to business or personal. The more business use you have, the higher your tax deductions will be
- Driving between home and work is not considered business use of the vehicle
- Whether you are an employee or self-employed, if you use a vehicle for work it is important to keep all receipts for any (and all) costs incurred. In an audit from CRA if you can’t give documentation for a deduction it likely won’t be allowed
Related: The Ways We Overpay on Taxes