Automobile Allowances - Tax Free Money

Personally owned vehicles used for business travel can offer a great way to earn tax free money while getting a business deduction. CRA specifies a specific allowance rate a business can pay the individual. The CRA prescribed allowance is a business deduction to the business and a tax-free receipt to the individual. The amount is discussed HERE. The allowance rate is a set amount, no matter the actual operating costs of the vehicle. To remain a tax-free allowance to the individual, the amount must be reasonable, measured solely by kilometres, and not supported by any other reimbursements. Examples where the allowance is NOT tax-free include:

1. Amounts paid in excess of the CRA prescribed per kilometre allowance rate discussed HERE unless the amount is "reasonable". If the circumstances indicate that a higher per kilometre rate is "reasonable" and is supportable, CRA will allow the amount to be tax-free to the individual. However, the excess will NOT be deductible by the business. 

2. Monthly allowances not based on kilometres travelled. For example, a set $500 per month.

3. A combination of a per kilometre allowance rate and a reimbursement of actual expenses. 

4. A combination of per kilometre allowance rate and a monthly allowance not based on kilometres travelled.

If the allowance is not tax-free, the recipient must include the total amounts paid by the business in employment income. The recipient may then deduct reasonable expenses on this income based on the operating costs of the vehicle and the kilometres driven. This requires the recipient to track all mileage through a log and track all operating expenses of the vehicle. Failure to keep a log or estimating the actual operating expenses can result in CRA overturning the deduction and replacing it with their own estimate which may not be favourable to the taxpayer. If you are claiming automobile expenses relating to the use of your vehicle at work, you must maintain a log book indicating the total kilometres you drove in the year and the kilometres you drove to earn employment income. The log book should also contain the date, destination, and the distance traveled for each trip. Make sure that you record the odometer reading of the vehicle at the beginning and end of each year.

Click HERE on more discussion on Automobile Allowances.

Here is a great tax tip. Use a vehicle with low operating costs for business travel and ensure the amount paid qualifies as a tax-free allowance. Often, in these circumstances, the allowance rate will exceed the actual operating and depreciation costs of these types of vehicles. The difference between the allowance rate and the actual operating cost rate is a non-taxable receipt to the individual and the business can still deduct the full amount paid to the individual.

Another great tip to consider is when a taxpayer calculates that the CRA per kilometre rate is not adequate to cover the operating costs and wishes the business to reimburse actual expenses. This is discussed HERE. 

Detailed records are required. Click HERE for more.

Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice. 

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