Motor Vehicle Expenses

There is a misconception out there about vehicle expenses that I would like to address.  If you talk to most people they will agree that keeping receipts, especially those for vehicle expenses is really time consuming and cumbersome.  As a result a lot of business people either on advice or though misunderstanding have come to the conclusion that so long as they track their mileage (approximately), they can just expense their vehicle usage using a per kilometer vehicle rate as prescribed by the CRA.

The problem is that this is not correct.  CRA specifically state in their Interpretation Bulleting 522 that receipts and mileage must be kept and that total documented expenses are to be expensed as a percentage of total vehicle use.  The misunderstanding occurs because “employees” can be reimbursed for mileage they drive on behalf of the employer, and no receipts are required except to the extent that the employer requires them.

It is important to keep in mind that the CRA per kilometer rate can be used for “employees”.  So if you have a corporation and you are an “employee” of your corporation you can have your corporation reimburse you for your vehicle use (the vehicle must be your personal vehicle and not owned by the corporation).  To do this you must keep track of kilometers driven for business use, and you should ensure that the documentation specifies where you went and the number of kilometers driven.  I know “salary” is not as tax efficient as dividends, but the rules don’t say how much your “salary” has to be.  Therefore I would say $3,500 is a good salary and then pay the rest of your remuneration in dividends.  By doing this you can use the more lucrative (and easy) per kilometer rate for your vehicle expenses.

If the vehicle is owned by the corporation then the expenses must be based on use and all receipts much be kept to support the expense claim.  On a side note, if the corporation owns the vehicle you will want to ensure that there is less than 10% personal use.  The CRA has a nasty section called stand-by-charge, which can cause major tax consequences if the vehicle is not used at least 90% for business use.

Whatever your situation make sure you understand your options and ensure that you keep all your receipts whether you think you need them or not.  Having receipts will ensure that no matter what the CRA throw at you, you will be able to defend yourself and win.