In the final instalment of this series on what creates the most HCL with the CRA in our SAS (“harassment, conflict and litigation” with the “Canada Revenue Agency” in our “self-assessment system”), we cover the granddaddy of disputable expenses – automobile costs. Any tax auditor worth his salt will zero right in on auto expenses like my tee shots to water. Why? Because everybody loves to drive and everybody loves to deduct car expenses. The problem is that the rules in this area are so onerous and complex, few taxpayers under investigation ever come out of it with no HC or L. It’s the record-keeping burden that gets most people into the HCL zone. So heed the following, and minimize your grief.
First, let’s summarize the basic rules for deductibility. As with any expense, the costs deducted must be in connection with your business. So how do we identify the business portion of the cost of something we regularly and continuously use for both personal and business purposes?
Anyone who uses a car for business should keep track of the total amount of kilometres driven during the year, and a detailed account of which of those kilometres were driven in the performance of their business or employment functions.
Keep receipts and a detailed account of all your auto expenses, such as gas, repairs and maintenance, insurance, licence, registration, car loan interest and leasing costs. If you own your car, you may be able to claim depreciation (CCA).
Now you’re almost there, but you should be aware of certain limits that apply. If you lease your vehicle, deductible payments are restricted to $800 per month (or less, based on a formula, if the value of the car exceeds $30,000).
If you’ve borrowed to purchased your car, loan interest is limited to a maximum of $300 per month. For CCA purposes, there is a maximum on the capital cost of $30,000.
Finally, if you receive a non-taxable per-kilometre allowance from your employer, then you are not entitled to claim any auto expenses personally.
These rules are fairly detailed and objective, so where does the HCL come in? Problems normally arise in two areas – record-keeping, and what constitutes business mileage.
Most people by nature do not keep records as meticulously as the CRA would love to see. If you are audited, and need to justify the amount of kilometres you drove in a year for business purposes, the best evidence you could have would be a logbook where you keep track of where you drove, the number of kilometers, and the business purpose. Compare that to the total kilometres driven for the year, and you have pretty well justified your calculation. In most cases, however, a logbook does not exist, and the taxpayer is left to plead, cajole, regale and negotiate with mostly unsympathetic auditors to have them accept his ad-hoc percentage of business use.
In Quebec, the law requires that you keep a logbook if you drive a company car. Employees must provide their employer with a logbook within ten days after the end of the year, or face a fine of $200.
The second issue of concern is that sometimes it is not clear whether a trip qualifies as business use. Some taxpayers are unaware that travel from home to the place of work does not constitute business travel. However, here’s a tip: if you start out at home, make a stop for business purposes, say at a client’s premises, then proceed from there to your office, then the entire trip would qualify.
What about the case where home is the regular head office and work is carried out at remote sites, such as in the case of a self-employed contractor? If you can establish that your home is your center of operations, then all travel to a work site should be considered for business.
In this series of posts, we touched on some of the most common areas where taxpayers find themselves in hot water with the CRA. Our SAS requires good record-keeping and knowledge of the law. Hopefully, these articles have helped you with the SAS and your HCL level should go down from here.