Auto expenses aren’t guaranteed deductions

If you use your vehicle to visit clients at their homes or places of business, you’re likely aware that you may be able to get some tax relief for the expenses associated with operating your vehicle.

But, as a recent case (Showers v The Queen, 2014 TCC 32) demonstrated, your ability to claim motor vehicle expenses is based on whether or not you have kept appropriate receipts and proof of mileage driven.

The taxpayer, Showers, is a cabinet installer and worked for a kitchen company. On his 2008 and 2009 tax returns, he claimed motor vehicle expenses for his pickup truck, amounting to nearly $6,200 and $9,800 respectively, along with GST rebates.

Under the Income Tax Act, if an employee uses his vehicle for work, he can deduct the business portion of the operating expenses from income when he files his tax return. Yet many employees who otherwise might be eligible to claim their motor vehicle expenses choose not to if their employers provide them with per-kilometre reimbursements. As long as this allowance is considered reasonable, it does not have to be included in income and, thus, is tax-free.

For 2014, CRA defines “reasonable” as 54 cents per kilometre for the first 5,000 kilometres and 48 cents thereafter (higher for the territories). For the years in question, 2008 and 2009, the limit was 52 cents for the first 5,000 km, and 46 cents thereafter.

If, however, an employee determines that the allowance her employer pays, although reasonable, doesn’t cover the actual costs of operating the vehicle, the employee can choose to deduct the business portion of her actual operating expenses as long as she includes any allowance received from her employer as income.

Amounts claimed were excessive

The issue that CRA, as well as the Tax Court judge, had with these expenses was that the amounts claimed appeared excessive and lacked “sufficient reliable evidence” to allow CRA and the Court to estimate the proper expenses. While Showers agreed the amounts claimed were excessive, he blamed his tax preparer, adding he’d never actually reviewed his tax returns before signing and submitting them.

He also acknowledged the kilometres driven for employment purposes recorded on Form T777, Statement of Employment Expenses, were inaccurate and the correct number of kilometers was the one reported to his employer for purposes of being reimbursed.

This, in turn, posed an additional problem. Showers’ employer had reimbursed him $0.38 per kilometre, but the taxpayer failed to fully include these reimbursements in his income for the years in question. In 2008, he underreported his reimbursement and, in 2009, he neglected to report any of the amounts he was reimbursed.

Another issue with the taxpayer’s claim was that “most of the items claimed as motor vehicle expenses appear to be unreasonably high.” Yet, despite acknowledging that the amounts claimed were wrong, Showers could produce neither the correct amounts, nor any reasonable estimates. He’d given the receipts to his tax preparer, who was “nowhere to be found.” Showers attempted to argue that he should at least be allowed to claim expenses up to the CRA-approved allowance rates in effect for 2008 and 2009.

But the judge didn’t buy that argument, saying, “The allowance policy does not reflect actual expenses in a particular case and is not meant to. […] These are amounts that the CRA accepts as reasonable allowances that may be paid by employers.” In conclusion, the judge said, given a lack of any receipts, this was “not a case in which the Court should bend over backwards to help a taxpayer who is not able to prove his case.”

The judge disallowed all vehicle expenses claimed, concluding the taxpayer “must bear the responsibility for permitting excessive claims to be made in his income tax returns.” This case represents yet another reminder to advisors to ensure that we, and our clients, keep adequate records and copies of all receipts to support any claim for expense deductibility on our income tax returns.

Cost of The company car

The most cost-effective way to own the vehicle depends on variables such as its value, the percentage of business use and operating costs. Calculations are complex, so have an accountant crunch the numbers. Dean Paley, an accountant and financial planner in Burlington, Ont., says it usually makes more sense for the company to own the car when business use is at least 60%.

When you drive a company-owned car for personal use, there are two taxable benefits.

1. The standby charge: This is based on 2% of the original cost of the vehicle, plus sales tax, with another calculation for the length of time the vehicle is available.

2. Operating cost benefit: This is based on a per-kilometre rate if the company pays for gas, maintenance and insurance. The charge for 2013 was $0.26/km if personal use was less than 50%. If business use was more than 50%, the employee can either take the default per kilometre charge, or half the standby charge.

– Stuart Foxman is a Toronto-based financial writer.

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.