This article is taken from our quarterly overview of Canadian news, a newsletter published by the Canadian member firms of Moore Stephens North America. These articles are part of our mission to become the partner of choice for your success by keeping you up to date.
The Canada Revenue Agency (CRA) seems to be working on a new project: motor vehicle expenses. This change comes as a surprise, since in its last communications, the CRA was proposing to disallow business owners’ personal vehicle expenses.
According to communications we’ve recently received, CRA is focusing on companies that were reporting expenses on the vehicle expense line of their tax returns. CRA usually requests the following documents and information:
- A detailed list of ledger transactions relating to vehicle expenses.
- Invoices for the ten largest expenses incurred during any month of the year.
- A list of vehicles with the names of their owners.
- Make and model of vehicles leased by the company.
- The breakdown (in percentages) of personal and business use, as well as a copy of the log used to monitor business and personal use.
- An explanation of how the company deals with professional and personal use. For example, the CRA asks whether the expenses have been deducted or reimbursed, or whether the company is presenting the expenses as an employee benefit or standby charge.
It seems that the years 2016 and 2017 are targeted, which will soon be excluded.
One of the most common problems faced by accountants is that many clients fail to keep travel logs properly. In addition, some customers have purchased vehicles in the owner’s name and not in the company’s name, even though the expenses are deducted by the company. Another problem is that the only supporting documents submitted for expenses are credit card statements, not invoices or receipts. This could be a problem, as the CRA has stated that it will not accept credit card statements as they do not provide sufficient detail. To date, we have received no information from CRA that credit card statements will not be accepted, but we have reason to believe otherwise.
General rules for motor vehicle expenses
In general, companies have to comply with different rules depending on whether the vehicle belongs to an individual or to the company. When the vehicle is owned by the company, certain calculations may be required to determine the benefits of the standby charge or standby charge. Usage benefits are calculated on a per-kilometre basis for each kilometer driven for personal use ($0.28 per kilometer). This amount must be included in the income of the person using the vehicle. You must also take into account the cost of the right of use. If the vehicle is company-owned, this fee is 2% of the initial cost of the vehicle. If the vehicle is leased by the company, these costs represent 2/3 of the monthly rental costs. These two figures are then multiplied by the number of months the vehicle can be used during the year. However, a reduction in the standby charge may be applied if the vehicle is used more than 50% for business purposes and less than 20,000 km for personal use. In this case, the right-of-use fee is calculated on a pro rata basis according to personal use in relation to total use.
The challenge for many customers and taxpayers is to keep a good travel log. To avoid having to log every trip, the company can pay a “reasonable allowance”. According to CRA rules, a reasonable allowance is $0.58 per kilometer for the first 5,000 kilometers and $0.52 for each additional kilometer. ARC requires monthly mileage reports. Therefore, other supporting documents and receipts are not required for actual user charges.
If reasonable compensation is paid, it does not appear on the individual’s T4 and the individual is not required to declare it. The company deducts this expense as a vehicle-related expense.
Remember: it’s important to ensure that customers and taxpayers retain sufficient documentation to support vehicle expenses.
Written by Howard Wasserman, CPA, CA, CFP, TEP, of Segal LLP. This text was written as part of our quarterly overview of Canadian news, a newsletter published by the Canadian member firms of Moore Stephens, North America.
