It’s the most wonderful time of the year – income tax season. It might be safe to assume that Canadians all over the country are preparing to, if they haven’t already, file their taxes for the previous year. Yum.
In our latest blog post about taxes, 3 Tax Breaks You Don't Know About, we highlighted three key deductions that a lot of people don’t typically take advantage of – self-employment expenses, childcare expenses and moving expenses. There are tons of deductions that a person can declare on their taxes, however, motor vehicle expenses are an allowable deduction that most Canadians are unaware of.
If you require a vehicle to earn employment income, whether you’re sitting full-time behind the wheel or frequenting the highway for visiting clients, there are automobile expenses that Canadians should use as tax deductions on income tax returns if the appropriate criteria is met. It’s important to note – driving to work and back home every day does not make a person eligible for a tax return. However, for those who spend more time in a car than an office, according to The Canada Revenue Agency, you can get a bigger tax return this season if you meet the following requirements:
1. “You were normally required to work away from your employer’s place of business or in different places.”
Canadians who use more than one motor vehicle to earn an annual income should calculate each vehicle’s expenses separately. For a person who uses one vehicle for both employment and personal use, ensure that you’re only claiming the percentage of expenses related to earning income. Just to reiterate: if you use your own vehicle to get to and from work every day, you can’t claim your daily commute costs as a vehicle expense (that’d be nice though).
2. “Under your contract of employment, you had to pay your own motor vehicle expenses.”
If you are responsible for paying for all the costs related to the vehicle, allowable tax deductions for your vehicle include: fuel (gasoline, propane, oil), maintenance and repairs, leasing costs, insurance and registration fees and interest paid on a loan used to buy the vehicle.
3. “You did not receive a non-taxable allowance for motor vehicle expenses. Generally, an allowance is non-taxable when it is based solely on a reasonable per-kilometre rate.”
If your work reimburses you or you’re given a car allowance to cover the costs of a company vehicle, then you’re not eligible to claim vehicle expenses. Vehicle allowances given by employers are based on reasonable rate per kilometers driven. If your costs are higher than your allowance, The Canada Revenue Agency suggests reporting the allowance as income and deducting expenses that go over.
4. You keep with your records a copy of Form T2200, Declaration of Conditions of Employment, which has been completed and signed by your employer.
Driving a company car is considered a taxable benefit – a part of an employee’s income that is subject to source tax deductions. If you drive a company car, you could be taxed in two ways: a standby charge or an operating benefit. A standby charge covers your personal use of the vehicle, which is usually two per cent of the original vehicle’s value for each month of the year you have access to it. Standby charges can be waived if you can prove that you use the vehicle for business more than 50 per cent of the time. An operating benefit is any operating expenses paid by your company, which is calculated by the employees use minus any costs that have been reimbursed to your workplace.
If you’re eligible to claim vehicle tax by allowable motor expenses, keep a log of both the kilometers you drove in the last year and the kilometers you drove for employment. When completing your tax return, enter the amount you’re claiming in the Calculation of Allowable Motor Vehicle Expenses area on your T4400 form and attach it to your paper return. Along with the income tax forms, you’re required to obtain a letter from your employer that states you were required to use a vehicle for work.
If you’re not eligible to claim vehicle tax but think that you might be in the future, start keeping a detailed log of your vehicle usage. Support expense claims by writing down how many kilometers you drive for work, the nature of the trip and any vehicle expenses you make. The more you claim on your vehicle expenses, the stricter the Canada Revenue Agency will be. Prepare for any audits of your vehicle history by keeping a journal that states where exactly you’re driving and why. For an example log book, click here.
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