Let's chat about auto allowances and business travel allowances.
The rules for being able to claim your vehicle expenses related to business use are complex and inflexible ... okay okay ... stop your moaning ... and just get on board with the program if you want to claim your tax deductions!
Some advanced tax planning and meticulous paperwork will help you take advantage of these potential tax benefits.
Grab a cuppa and settle in ... it's complicated!
Canadian bookkeeping and tax for business use of your personal vehicle is different than the U.S. ... so don't confuse U.S. rules with Canadian rules.
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Living out allowances covers meals, lodging, and incidentals and only applies to employees travelling for business. Generally CRA expects sole proprietors to use the detailed method to claim business travel tax deductions. Using Treasury Board / Joint Council rates for client billing of travel expenses is not a problem if that is what has been agreed upon in your engagement letter.
As a small business owner that uses the sole proprietor business structure, you report your vehicle expenses on Form T2125 using the detailed method. This means you do have to keep all your receipts ... along with your log book.
Section 8 of CRA's publication IT521R - Motor Vehicle Expenses Claimed by Self-Employed Individuals says:
"8. To be deductible, "motor vehicle" expenses must be reasonable in the circumstances and supportable by vouchers. (The vouchers need not be filed with the individual's income tax return; however, they must be retained for examination on request.) A claim by an individual for "motor vehicle" expenses calculated on a cents-per-kilometre (mile) basis is NOT acceptable. [my emphasis]
To support a claim where a "motor vehicle" is used in part for business purposes and in part for personal purposes, a record should be kept of total distance travelled and distance travelled for business purposes in a year. The record should contain at least the date, destination and distance travelled for each trip."
Okay, I can hear all of you owner-managers out there saying, "Hey, I'm incorporated, I think I have more options than a sole proprietor to claim vehicles expenses. Am I right?"
Perhaps you might of heard that it's not such a great idea to have the company own your vehicle any more. Is that true?
Work your way through the links below to learn about the various ways to claim vehicle expenses or travel allowances ... and who is allowed to use auto allowances and living out allowances ... because you guessed it ... not everyone can.
Detailed Vehicle Travel Method - sole proprietors must use this method -see Section 8 of IT521R - Must use an auto log
Tax Free Auto Allowance Rates - for use by employees - must keep an mileage log; NOT available to sole proprietors use
Business Travel Allowances - for use by employees only for meals, board and incidentals
Simplified Vehicle Travel Rates - used for medical expenses, moving expenses, northern resident deductions
Incorporated Business Owners
Personal Vehicle Use - Reimbursement Options for Incorporated Business Owners - requires an auto log
Company Vehicle - Taxable Benefit Rates - Operating Expense based on mileage log
Company Vehicle Standby Charges - Auto Benefits Calculator
The answer is yes, you sure can for tax purposes ... that's the reason you are tracking your mileage ... so you can prorate your vehicle expenses between business use and personal use. In my article on using your personal vehicle for business purposes, you will find a chart for all the operating expenses you can claim.
You will find some additional information in my section on auto logs as well.
I like to track all my vehicle operating expenses throughout the year to make tax preparation more efficient at year-end and to make sure I don't lose any of my invoices.
If you are incorporated, your options are a bit different. Learn about them here.
No one said small business bookkeeping would be easy. Just develop and stick with a system to keep your paper organized and it won't feel like a chore.
Bookkeeping Essentials › CRA Auto Allowances and IRS Mileage Rates