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tax matters

You may be eligible to claim expenses in three scenarios: 1) you’re self-employed and use your car for business; 2) you’re a partner and drive your car for partnership business; or 3) you’re an employee and use your car in your work.pogonici/Getty Images/iStockphoto

It's a new era in our home. Our oldest son, Win, has been driving for almost a year now and his sister, Sarah, is now learning to drive. The kids are driving a really old SUV that was given to us by my sister. The other day, Win came to me and said, "Dad, we'd like some new floor mats for the SUV." I just looked at him and said, "I think that would be a fair trade."

What type of car are you driving today? More importantly, are you getting any tax relief for the costs you're incurring? It's time to turn your vehicle into annual tax savings. Let's see how that's done.

The rules

Gaining tax relief from your car starts with using your vehicle for certain purposes. I'm not talking about employer-provided cars. This is a vehicle you've purchased or leased. You may be eligible to claim expenses in three scenarios: 1) you're self-employed and use your car for business; 2) you're a partner and drive your car for partnership business; or 3) you're an employee and use your car in your work.

In the first two cases, where you're self-employed or in a partnership, all you need to do is track your kilometres driven for business and your total kilometres, and keep a record of your expenses. If you're an employee, you have some additional requirements: Your employer must ordinarily require you to work away from your employer's place of business, or in different places. In addition, you must be required under your employment contract to pay your own automobile expenses, and cannot have received a tax-free automobile allowance from your employer. Finally, your employer will have to sign Form T2200, which you should keep on file in case the taxman wants to see it.

If your employer is paying you an allowance for the use of your car, and the allowance is a reasonable reimbursement of your actual expenses, you can treat it as a tax-free amount. In this case, you won't be able to claim a deduction for your automobile costs. If the allowance, however, is unreasonably low, you'll save tax if you include that allowance in your income and then claim your actual expenses if you meet the conditions above. An allowance is normally considered reasonable if it's calculated on a "per-kilometre" basis and doesn't exceed 54 cents for the first 5,000 kilometres of business travel and 48 cents on kilometres over 5,000 (add 4 cents a kilometre in the Yukon, Nunavut and Northwest Territories).

The expenses

Make sure you keep a record of, and receipts for, all your car expenses. These should include gas, oil changes, repairs and maintenance, car washes, automobile club dues, insurance and licence or registration fees. You can also claim a portion of your lease costs (with limits that effectively restrict your deduction to the portion of the lease payments that relate to the first $30,000 of the car's cost, plus GST/HST and PST), or interest on a car loan (to a maximum of $300 a month) if you've purchased the vehicle.

The portion of these costs that are deductible will relate to the percentage of your driving that is for business or work purposes. So, if your business kilometres in the year were, for example, 10,000 and your total kilometres driven were 30,000, then you'd be entitled to claim one-third of the costs I've mentioned. If you've purchased the car, you can also claim depreciation – called capital cost allowance (on a maximum value of $30,000 plus GST/HST and provincial sales taxes).

The nuances

Make sure you keep a log book or record of your business travel or the taxman may disallow your deductions. There's a simplified method for tracking business travel that the taxman accepts, but it's not so helpful if you ask me (see more here).

Business travel does not include driving from your home to your place of work. But here's a tip: Stop at a client's place on the way to the office, or on the way home again, and this will turn that trip into business kilometres. Business travel also includes a trip from your home to a client's place of business and back home again.

Finally, I talked about the dollar restrictions on CCA, lease costs and interest costs for expensive vehicles. There are certain vehicles that escape these restrictions such as taxis, ambulances, hearses, buses for transporting passengers, and vans or pickups in certain cases. Sorry, if you were hoping to get more tax relief by driving a hearse in your accounting, pizza delivery or landscaping business, that won't work.

Tim Cestnick is managing director of Advanced Wealth Planning, Scotia Wealth Management, and founder of WaterStreet Family Offices.