How do I deduct business use of my vehicle? I get this question a lot.
The following covers the basics. For specific situations contact your business advisor, book keeper, accountant, tax planner or tax preparer. They should all know this but, if they don’t call SOS TAXMAN (SOSTAXMAN.COM).
First do you have a proprietorship, a corporation, or is this for employment expenses. If it is a corporation you can use option A or B. For all others option B is your only choice. In all situations you need to have a vehicle log to track usage. Only business use can be deducted.
There are cellphone based apps, I have used ODOTRACK to keep my log. I now use Telus Drive. It is cellular based and uses GPS to track all my trips. I simply select business or personal for the trip. I can send the trips to my computer and enter the purpose of the trip. For example “Airport – Toronto – Padgett Convention” or “met John Doe (potential client) for lunch“ are good. The GPS shows the start and end points of the trip and the kilometers. If I made a mistake and marked a business trip as personal I can change it. It is best to do this weekly or monthly before you forget the reason for the trip.
This is the easiest option and what I do in my office. I own the vehicle pay all expenses personally. I then fill out an employee expense sheet and charge per kilometre for the vehicle use. I use the CRA maximum rates.
The automobile allowance rates for 2022 are 61¢ per kilometre for the first 5,000 kilometres driven and 55¢ per kilometre driven after that. For 2021 it is 55¢ for the first 5,000 kilometres driven and 53¢ per kilometre driven after that. For 2020 it is 59¢ for the first 5,000 kilometres driven and 53¢ per kilometre driven after that. In the Northwest Territories, Yukon, and Nunavut, there is an additional 4¢ per kilometre allowed for travel.
If my company owned the vehicle and it was available for personal use there would be a problem. You have to use form “RC18 Calculating Automobile Benefits” to determine the taxable benefits. I find that this taxable benefit can be very high and stays high even when the vehicle ages. For these reasons for most clients it is best to own the passenger vehicle in your own name and charge the corporation for usage. The situation is different for other vehicles such as welding truck that is never used for personal use.
For a typical passenger vehicle I have found the per Km method is the best for most clients. This method results in lower bookkeeping fees and fewer receipts that you need to keep.
This is your only option if you are self-employed or want to claim employment expenses. Again you need to keep a log. You need to keep all vehicle expenses such as, fuel, maintenance and repairs, insurance, registration, and capital cost allowance. The amount that is deductible is the percent of business use determined by dividing business km by total km for the year. For employment expenses a form T2200, Declaration of Conditions of Employment has to be signed by the employer.
If you provide a loan or a loan guarantee to a business it is essential that there is a written agreement even if it is for your spouse or child. I am not talking about whether they are trustworthy. That is whole other discussion. I am just talking about the tax consequences if it is not paid back.
A good illustration of this is a Tax Court of Canada case. In this situation a mother guaranteed a business loan for her son’s corporation. She tried to deduct the losses on her tax return. It was denied. She had no expectation of investment income so no deduction is allowed.
What could she have done differently? She could have had an agreement that the corporation had to pay her an annual guarantee fee. This would have made all the losses deductible.
Another common situation is a loan. The same principle applies in this situation as well. There needs to be a loan agreement detailing the terms. The interest rate needs to be specified.
When people go into these arrangements for relatives they still need a written agreement or tax deductions will be lost.
The Allowable Business Investment Loss (ABIL) can be used for these losses but there is a requirement that there was a potential of investment income. The written signed agreement provides you the evidence needed.
I believe that the average person knows how to spend their money better than the government. For that reason I want everyone to pay the least tax that is legally possible. Instead of voluntarily paying extra taxes so the government can give it to their favourite cause or to subsidize some business that competes with my clients, I prefer to use that money for my family and to give to the charity of my choice.
I have clients that were not doing their taxes or bookkeeping correctly costing them Tens of Thousands of dollars. I corrected these mistakes resulting in refunds of up to $20,000. I am not talking about wealthy people. This is significant money for them. The sad part is there are limits to how many years we can go back to collect these refunds. It is 3 years in most cases and up to a maximum of 10 years in some situations.
A lot of people start a business without a lot of knowledge beyond their area of expertise. This costs them money. Sometimes they will concentrate on the business and not worry about the paperwork. It is easy to justify spending time on finding new clients and getting work done. Doing all the paperwork may not be as exciting or fun. But it needs to be done. I know some people that are months behind in sending out invoices. If you do not invoice on time it can cost you. Customers may not remember what you did and be annoyed at getting a larger bill all at once. Many find it more palatable to receive smaller invoices monthly or weekly. A customer might go bankrupt and you may never collect. This is work you have already completed but did not get paid. Can you afford to work for free? You are losing money you already earned.
If you are not compliant with CRA rules, it could cost you a lot in interest and penalties. The first penalty is bad enough but the next one could be doubled. Repeat offenders can get very high penalties.
If you do not keep the bookkeeping up to date, how do you know if you are making a profit?
If you have several products or services do you know which one is making you the largest profit?
Are you calculating GST correctly? If not you may be paying more than is necessary.
Are you calculating and paying payroll source deductions correctly and on time? Errors and late filing can cost you in penalties and interest.
Presentation Topics we are going to discuss :
- The legal setup of your business.
- Registration with CRA and tax compliance.
- Avoiding Audits
- Avoiding Penalties
- Hiring Employees and Sub Contractors
- Record Keeping
- What are Debits and Credits
- Paying Yourself
- Paying the Least Tax (Tax Planning)
WHEN: Thursday May 14, 2015 8:30 am to 12:30 pm
WHERE: Atlas Business Centre 7633 50 ST Edmonton AB
PRICE: $97.00 plus GST
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HOW TO START A SMALL BUSINESS IN ALBERTA
So you want to start a small business now what. First decide if you want to be a sole proprietor, have a partnership, or a corporation. You may not be familiar with the terms and the legal relationship so I will discuss each briefly in the following document:
If you have a corporation you need to register the corporation for a business number but not necessarily for GST. Even a sole proprietor or partnership may need a business number. The following document provides some explanation:
When you hire employees you have additional obligations. First you need a payroll account with CRA (Canada Revenue Agency). See Part 2 for details of registration. There is a potential trap with hiring subcontractors. The following document provides additional information:
The next part discusses how to keep records and how long they need to be kept and in what format:
How do you pay yourself is a question I get quite often. There are tax and other consequences. The following document describes some the of basics: