Tax Tips: Car Expenses and Benefits

Access to a car can be crucial to running a small business effectively.  Costs of ownership, however, can be onerous, especially in the early stages when your business is not hugely profitable.  Luckily, Revenue Canada allows individuals and corporations, who use their cars to generate income, to deduct the expenses and actually provides fairly comprehensive (i.e. complex) guidance to this end.  Below are some of the main provisions that impact small business owners:

 

  • If you purchase your car, the maximum cost eligible for deduction $30,000 + sales taxes.  In year one of purchase you are allowed to deduct 15%(CCA) of the cost of the car (up to $30k) . For subsequent years the deduction is 30% of the remaining balance. 
  • Lease costs are generally deductible up to a maximum of $800 per month + sales taxes = $9,600 per year.  So, if your Porsche (essential to your business, of course) costs $1,400 a month to lease, the maximum deduction is only $800.
  • Other deductible costs include gas, insurance, repairs, licence and registration fees
  • ALL costs must be reduced, on a pro rata basis, by the percentage that the car is used for personal purposes.  This percentage is based on the number of kilometres driven for business vs those driven for personal purposes.
  • If you are registered for GST (and HST/QST), you can claim the sales taxes at the same percentage of business vs personal use.
  • An owner (or employee) of a corporation can charge the corporation for business use of their car as follows:

$0.54 per km up to 5,000 kms in 2016

$0.48 per km greater than 5,000kms

The employer should keep a log of kilometres driven for business include name of customer, odometer readings, date etc.

  • It is important to note that when an employee/owner draws a fixed monthly amount from the corporation, this will be treated as a taxable benefit to the employee/owner. This can result in significant additional taxes, depending onyour tax bracket.  To ensure that this does not happen, allowances should be adjusted at the end of the calendar year to either a)reflect actual expenses paid or b)based on mileage allowance explained above.

Revenue Canada , while recognizing the deductibility of automobile expenses, wants to ensure that businesses don't benefit from personal use of car (while people without businesses don't have this option).  Ultimately, common sense should be used -  expenses incurred to earn income are deductible.  Expenses that are clearly personal in nature are not.