New CRA Motor Vehicle Logbook Policy
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The CRA states that the new logbook policy is designed to simplify recordkeeping and reduce paperwork. |
In an attempt to make things easier for small and medium sized businesses, the Canada Revenue Agency (CRA) recently released a new logbook policy for tracking business travel. The CRA states that the new logbook policy is designed to simplify recordkeeping and reduce paperwork, and therefore ease the tax compliance burden of small and medium sized businesses. However, the estimation process is somewhat complicated in itself, so business owners will need to decide what makes the most sense for them. Also, the new CRA policy will likely not benefit business owners whose business travel varies significantly from year to year.
As a bit of a background, in order to be eligible for a business deduction for tax purposes and for an Input Tax Credit (ITC) on GST/HST, vehicle expenses must relate to business travel or commercial activity. As a result when a vehicle is used for both business and non-business purposes, the taxpayer must apportion the vehicle expenses relating to business use. In the past, to support a deduction or ITC claim, businesses were required to maintain records that substantiated the details (i.e. destination, distance and reason) of business related travel for the entire year. The most common form for these records was a logbook.
The CRA is now prepared to accept a logbook that is maintained for a sample period as evidence of a full year’s usage of a vehicle. Businesses can choose to maintain a full logbook for one complete year to establish the business use of a vehicle in a base year. After one complete year of keeping a logbook (starting in 2009 or thereafter) to establish a base year, a three-month sample logbook can be used to extrapolate business use for the entire year, providing the usage in the sample period is within the same range (within 10%) of the results of the base year. In accordance with this new policy, the following criteria must be met:
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The taxpayer has previously filled out and retained a logbook covering a full 12-month base period that was typical for the business. (The 12-month period is not required to be a calendar year.)
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A logbook for a sample period of at least one continuous three-month period in each subsequent year has been maintained (the “sample year period”).
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The distances travelled and the business use of the vehicle during the three-month sample period is within 10% of the corresponding figures for the same three-month period in the base year (the “base year period”).
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The calculated annual business use of the vehicle in a subsequent year does not go up or down by more than 10% in comparison to the base year.
The business use of the vehicle in the subsequent year will be calculated by multiplying the business use as determined in the base year by the ratio of the sample period and base year period. The following formula will be used:
An important item to note about this new policy is that businesses must demonstrate that the use of the vehicle in the base year is representative of its normal use. If it turns out that the sample year period is not within the 10% variance allowed, then the CRA policy can’t be applied. As a result, this new policy may only provide relief from the onerous documentation requirements where there is no significant change in the business use of the vehicles from year to year.
We also have concerns if a business owner has an unexpected change in business use that is significant, and in particular, where the three-month sample period is not the first three months of the year. In this sort of situation, this new administrative position won’t be available, and the business owner may unexpectedly be required to have records for a full year.
As a final note, the CRA announcement only addresses what business owners are allowed to do for the purposes of calculating business deductions and ITCs. Logbooks are also used by employees who are allowed to claim automobile expenses for business travel and by employers for calculating taxable benefits related to the personal use of automobiles owned by the employer. Although one would expect that the rationale set out in the CRA release could be used for these purposes as well, it is important to remember that the CRA has not confirmed this officially.
For more information on the CRA’s new vehicle logbook policy, contact your BDO advisor.
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