Working with your Corporation Part 8: Vehicle Expenses

When running your business you may require a vehicle to travel back and forth from offices or workplaces, pick up supplies, meet with clients and much more.  Vehicle expenses are a very typical deduction for most businesses.  Vehicle expenses may be reported in 2 ways: by mileage or by actual cost of vehicle expenses.  If you own the vehicle personally you should keep a mileage log to determine the amount of kilometers you traveled for business and then the company could reimburse you the prescribed rate per kilometer.  Because these prescribed mileage rates change it is good to inquire as to the current rates for reimbursement of mileage.  If the company owns the vehicle and you are using it for personal use then a mileage log must be kept for this method as well to determine which portion of the vehicle expenses are for business versus what is for personal.  The same rules apply whether you own or lease the vehicle.

Notes on vehicle ownership: It is important to differentiate who owns the vehicle, you or the company.  To determine this we must look at who the bill of sale is to (who purchased the vehicle).  Insurance should also be in the name of the owner of the vehicle.  Remember that you can sell a vehicle to the company, however this should be done at Fair Market Value and using an actual bill of sale.

Notes on keeping a mileage log:  It is important to keep a separate log for each vehicle which is driven for both business and personal.  The log should record the date of each business trip, destination, reason for the trip and the kilometres driven.  Also, make sure to record the odometer reading at the beginning and end of each year to determine the total kilometres driven in the fiscal year.  If you have a smart phone, such as an Iphone or Blackberry you can get a tracking app that can even work with your phone’s GPS for ease of tracking. 

Once you have maintained a log for a full 12-month period, the CRA has indicated that they would “afford considerable weight” to a log maintained for a “sample period” as evidence of the business use for a full year, if it meets the required criteria. 

If you want to avoid a mileage log you need to have a vehicle that is used for personal and a different vehicle that is used for business.

Tips on Audit Proofing your Business Part 2

The next tip for business owners is to ensure the business pays for its own expenses and the owners pay for there own expenses. As soon as you cross that line it is up to CRA scrutiny as to what happened. Instead of paying for expenses for your company, simply write a cheque to the company and let the company pay its own expenses. Same thing on the other side, don’t let the company pay for the owner’s personal expenses.

The next tip is to always make notes on your transactions. This is imperative as audits always happen years after the fiscal year(s) being audited. For example you may get audited in 2012 for the year 2009 and if they find things in 2009 they may go back further and audit years prior to 2009. For many people it is hard to remember what happened a couple months ago, never mind years ago. Notes in your bookkeeping and on source documents always help. Better to make a note and not use it, instead of not having a note when you need it.

Another tip is to ensure that vehicles are owned and expensed by the correct entity. If you are a shareholder of the corporation and you own a vehicle that is used for the business then you should not just have the corporation pay for your vehicle expenses. If you own the vehicle personally then you should track your mileage used for business and have the company reimburse you based on that mileage.(Currently acceptable: 52cents per km for the first 5,000 km and 45 cents thereafter) The reimbursement is an expense for the company, but not income to you. If you do it any other way an audit could cause you reassessment for personal use of vehicle expenses or the denial of company vehicle expenses.

In the case where the corporation owns the vehicle, then it is best to own your own vehicle personally to separate the 2. Simply use the business vehicle for business and the personal vehicle for personal. Many business owners, however, only own 1 vehicle that is used both for the business and them personally. In this case a mileage log should be kept to determine business vs. personal usage. Another thing to remember about vehicle expense deductions is that whoever owns the vehicle, should pay for the expenses. If you own the vehicle, you will either want to get reimbursed for business mileage or you may want to sell the vehicle to the business so it can pay for the expenses. Either way, if you use the vehicle for both personal and business use, you should keep a mileage log to determine personal vs. business usage. Mileage logs do typically stand up in audits.