My wife, Carolyn, has been looking for a new minivan. She’s been shopping all over looking for the right features, and price. “Tim, I found the van I want,” she said. “And as a special bonus, if we buy the car, it comes with a full-sized spare tire and they’ll throw in a pair of Reebok running shoes,” she said.
“Carolyn, forget it,” I said. “They give you a full-sized spare tire because they know you’re going to need it, and the shoes are for those times when you’re going to have to walk home. Let’s find something different.”
If you happen to own a car that’s a lemon, and you’re paying more than your share of repair costs, you might be entitled to some tax relief. Last week I spoke about commonly misunderstood expenses. The most misunderstood expense relates to your vehicle. Let me give you a primer and an update on claiming these costs.
Who can claim
You may be entitled to claim costs related to your vehicle if you’re an employee, partner or self-employed individual and use your vehicle for your work. Employees can deduct vehicle expenses if they meet four criteria: (1) you’re ordinarily required to work away from your employer’s place of business, (2) you’re required to pay your own vehicle costs, (3) you did not receive a tax-free allowance for use of your vehicle, and (4) your employer signs Form T2200 (which you should keep handy in case the taxman wants to see it later).
Now, a word about tax-free allowances: Your employer can pay you an allowance based on your kilometres driven for work purposes and, as long as the allowance is considered reasonable, it’s generally a tax-free allowance. In this case, you won’t be able to deduct any vehicle expenses. If the allowance is not reasonable (either because it’s too high or too low), then it will be taxable and you’ll generally be entitled to claim a deduction for your actual vehicle expenses.
If your work-related portion of your vehicle expenses is higher than the allowance you’ve received from your employer, consider reporting your allowance as a taxable amount, then deduct your actual vehicle expenses. You’ll generally come out ahead doing this.
If your employer owns the vehicle you’re driving and it’s used solely for work purposes, then the company can claim a deduction for all the vehicle costs and you won’t be able to deduct anything.
If you are a controlling shareholder in a private company, you should be aware of a recent court decision that could impact you. As a shareholder and employee you’d think you could receive the same treatment as any employee when it comes to claiming vehicle expenses. Not necessarily. In the case Adler v. The Queen (2009 TCC 613), the Tax Court of Canada decided that Mr. Adler was not entitled to claim a deduction as an employee for vehicle costs since, in the judge’s view, he didn’t meet all four criteria above. Specifically, Mr. Adler wasn’t truly required to pay his own vehicle costs according to the judge. The judge’s rationale was that Mr. Adler would not, as an employee, face any detrimental consequences if he failed to live up to the requirement to pay his own vehicle expenses. His own company wouldn’t sue him, for example.
I have problems accepting the judge’s rationale in this case. Nevertheless, the decision is out there, so owner-managers should consider having their corporations simply reimburse them for actual work-related vehicle expenses rather than taking a taxable allowance from the company and then claiming deductions personally.
What to claim
If you qualify to claim vehicle expenses, then the costs to claim include gas, oil, repairs and maintenance, insurance, licence and registration fees, car washes, automobile club dues, interest on a vehicle loan (maximum $300 per month) or lease costs (maximum $800 per month), and capital cost allowance (CCA – depreciation) if you own the vehicle (on a maximum vehicle value of $30,000 plus GST/HST and provincial sales taxes).
You won’t be able to claim 100 per cent of these costs, but the portion that represents your business use of the vehicle. So, you’ll need to track the kilometres driven for work purposes as well as your total kilometres driven. If your work kilometres were, for example, 10,000 km in the year and your total kilometres were 25,000 km, you’d be entitled to claim 40 per cent (10,000/25,000 x 100) of your total vehicle costs.