Almost everyone who uses an automobile for work or business should be keeping records of some kind to substantiate their tax deductions.
If your circumstances match any of the following situations, you should be maintaining automobile tax records:
1. You own and operate a business, and use your own car for business purposes.
As a sole proprietor, you may claim car expenses related to your business. However, you must be able to show that the expenses were incurred for the purpose of earning business income and were reasonable in the circumstances. Because your car has both personal and business use, you must keep detailed records of all expenses incurred and the kilometres driven on business-related activities as well as total kilometres driven.
If your business is incorporated, you are likely an employee of your corporation. In that case, your situation falls under item 3 below. If the car is owned by your company, see item 4 for more information.
Note that if a car is clearly a business asset and is used 100% for business purposes, then there is no need to keep separate kilometre and expense records. The expenses would be treated like normal business costs, and would be fully deductible.
Example: A car or van owned by your business is used throughout the day by you or your employees to visit clients or run errands for the business, and is left on the premises at night.
2. You are a partner and use your own car in carrying on the partnership’s business.
The same points noted under item 1 apply. You must maintain detailed records of the expenses incurred and the kilometres driven for business purposes.
3. You are an employee and must use your own car in performing your duties.
In order to deduct automobile expenses, you must meet the following conditions:
- you must be ordinarily required to work away from your employer’s place of business, or in different places;
- you must be required, under your employment contract, to pay automobile expenses incurred in the course of performing your employment duties;
- you must not have received a tax-free car allowance; and
- you must have CRA Form T2200 signed by your employer and you should keep it on file in case the CRA requests it.
The requirements needed to be able to deduct employment expenses are the same for an owner-manager employee as for any other employee. However, given that the owner-manager does not deal at arm’s length with the company, the CRA is likely to look more closely at these expenses.
The CRA’s website clarifies what is required for shareholder-employees in order to claim employment expenses. Specifically, an employee who is also a shareholder must satisfy two key conditions before deducting employment expenses:
- The expenses must have been incurred as part of your employment duties, and not as a shareholder.
- You must have been required to pay for the expenses yourself as part of your employment duties.
To meet both of these conditions, you must be able to establish that the expenses were comparable to expenses incurred by employees (who are not shareholders or related to a shareholder) with similar duties at your company or at other businesses similar to your company in size, industry and services provided.
Where both requirements have been met, you may, as a shareholder, have the authority to certify Form T2200 for yourself (or a related employee) to support a deduction of these expenses on your personal income tax return. If you have questions, please ask your BDO tax advisor. ✓
You may be receiving an allowance from your employer to compensate you for the use of your car. If the allowance is a reasonable reimbursement of your actual expenses, you can treat it as a non-taxable amount, and not deduct any automobile expenses. However, if the allowance is unreasonably low, you can include it in your income and deduct your actual expenses, if you meet the conditions above. You would then have to keep detailed records of expenses and kilometres driven.
The CRA would normally consider an allowance reasonable if it does not exceed the following rates (for the year 2022 (2023)):
- 61¢/km (68¢/km) for the first 5,000 km of business travel; and
- 55¢/km (62¢/km) for business travel over 5,000 km.
For distance driven in the Yukon, Nunavut and the Northwest Territories, add 4¢/km.
If the allowance exceeds these amounts, or could otherwise be viewed as being unreasonably high, it may be wise to track actual expenses and kilometres driven, in order to substantiate this higher amount, should the CRA ever challenge it.
Also, note that any allowance not calculated wholly on a reasonable “per kilometre” basis, is in most cases automatically considered taxable by the CRA. This would be the case, for instance, if you received a flat dollar amount per month.
4. You are an employee and your employer makes a company car available to you.
In this case, your employer has incurred the cost of the car (either purchase or lease), and so you would not have these expenses to deduct. However, because the car is available to you for your personal use, you are considered to have received a taxable benefit from employment, which can be a significant amount. If you drive the employer’s car only during business hours and it is left at the employer’s place of business during non-business hours, the automobile is not considered available to you for personal use and there is no benefit.
As you can see, most people who use their cars for work or business must do at least some recordkeeping. In all cases, you should maintain separate records for each automobile used. Automobile deductions are usually calculated for each vehicle separately. However, in certain cases, the CRA will allow a calculation based on combined data.
Most of the commentary in the remainder of this bulletin deals primarily with the first three situations. For information on employees who use company cars, see the section titled “Taxable benefit”.