Tax Tips: Business Vehicle Expenses

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Your vehicle expense is one of the most used business deductions available to a Realtor. You are allowed to deduct for income tax purposes the business portion of all vehicle expenses you incur to operate your vehicle, provided you use your vehicle for business purposes; that is, your vehicle is necessary for you to earn income.
A Realtor proprietorship must keep track of all expenses related to owning and running your vehicle for the whole year. Your ratio of business vehicle expense is calculated by dividing your annual business kilometres by your annual total kilometres. This means you must keep track of the kilometres you drive for business use.
Many Realtors don’t track their kilometres driven for business. They often just estimate the business portion of their vehicle usage at somewhere between 60 per cent and 80 per cent of the kilometres driven for the year. Some Realtors don’t even know their opening and closing kilometres for determining how many kilometres where driven during the year. Not good.
Canada Revenue Agency requires you maintain a detailed record of your driving activity. If you guestimate your total kilometres or your percentage of business kilometres, and do not have a detailed travel log of your actual driving activity, Canada Revenue Agency could disallow all your vehicle expenses for two or three taxation years. This disallowance will be a very expensive cost to you.
Keep a detailed travel log in your vehicle and track every kilometre of your business activity during the year. Write the starting kilometre on January 1 and the ending kilometre on December 31st. This activity only takes a few seconds each time you are in your vehicle but could save you thousands of dollars of income tax liability without the appropriate information.
The travel log entry should include: the date, the reason for the trip, the start and ending destination, and the kilometers driven. If you travel from place to place, start a new entry for each destination until you return home.
Note: your harmonized sales tax (HST) input credits for vehicle expenses are limited to the same proportion as your percentage of kilometers driven for business purposes.
Your allowable vehicle deduction from income includes the following types of vehicle expenses:

  • Loan Interest, if you borrowed money to buy your vehicle
  • Lease Payments, if you leased your vehicle
  • License Fees
  • Insurance
  • Gas and Oil you buy
  • Washes
  • Repairs and Maintenance

You will need to inform your vehicle insurance sales representative that you are using your vehicle for business, and that you will be transporting potential clients in your vehicle. You will be charged a higher insurance premium for your business use of the vehicle. Failure to report this information to your insurance representative may void your insurance should you have an accident.
Note: your business parking expenses and business toll charges should not be included in the above list of ratable vehicle expenses because these expenses are entirely deductible against business income.
Remember to keep all receipts for your vehicle expenses. You do not need to send the receipts with your income tax return. But, Canada Revenue Agency may ask you to produce all your receipts if they decide to audit your income tax return.
If you cannot produce receipts for the vehicle expenses you claimed in your income tax return, or if you did not keep track of your business kilometres driven and your total kilometres for the year, then your vehicle expenses will likely be disallowed.
The effect of disallowed vehicle expenses is an increase in your taxable income leading to an increase in income tax payable. In addition, you will have to pay penalties and interest on your outstanding re-assessed amount.
Buying a Vehicle
The Income Tax Act does not allow you to deduct the cost of your vehicle in one year. Instead, you are allowed to deduct the cost of your vehicle at a rate of 30 per cent per year on the declining balance. The amount is restricted to one half of that amount, or 15 per cent in the year you buy your vehicle.
This deduction is called Capital Cost Allowance. The maximum value of a vehicle you may deduct from your income is restricted to $30,000 plus HST. The maximum interest deduction you may claim on vehicle loans is limited to $300 per month.
Leasing a Vehicle
Vehicle lease costs are limited to $800 plus HST per month. However, there are restrictions on the lease amount deductions based on your deposit, terminal payments and kilometres driven. Before you file your income tax return, check to ensure the detailed calculation has been done correctly.
Solution: Take advantage of a business vehicle deduction.
A blog cannot deal with all aspects of a subject and is not intended to replace professional advice. Its purpose is to highlight information and identify areas of possible interest. Anyone wishing to discuss this blog or to make any comments or suggestions about this blog is invited to contact Jim Walker; see his profile for contact information.