Reimbursement of employee vehicle expenses is a complicated area of the tax act. The rules are very specific. I've taken some of the questions asked in the forum and consolidated the information on this page.
In E&Y's May 2013 newsletter, it discusses CRA's benchmark for a reasonable per kilometre allowance is laid out in Regulation 7306. The article states that In a 2012 technical interpretation the "CRA reconfirmed that the automobile allowance rates used by the Treasury Board of Canada Secretariat (TBCS) are generally considered to be reasonable for purposes of paragraph 6(1)(b) of the Act. This position was first announced in CRA technical interpretation 2007". These rates can sometimes be higher than the rates in Reg. 7306.
The article goes on to state that Reg. 7306 is a guideline for the CRA auditor to assess reasonableness. Other amounts can be considered as reasonable IF they are factually supported.
Reasonable employee auto allowances are tax free ... meaning they are not included in the employee's income.
E&Y states that "while an employee may receive a higher amount, the employer can only deduct the amount computed in accordance with the Reg. 7306 in computing business income".
What are CRA's rules around the mileage log for employees?
I was asked about CRA's mileage log. Here's the problem the bookkeeper had.
What do you do as a bookkeeper when small business owners don't follow the rules or don't facilitate making your bookkeeping tasks easier instead of harder?
Part of bookkeeping is using your own judgement, so I can't tell you
what to do in a situation like this ... but I will try to give you my thought process on how I
might go about coming up with a solution to the dilemma described above.
I'd be curious if the bookkeeper dealt only with the owner? Do s/he interact with the employees at all? Is the bookkeeper self-employed or an employee? Does s/he work at the place of business or from their home? These details were excluded but may have helped coming up with options to solve the problem.
Scenario #2 is out. The small business owner paid the money to employees not himself through a cheque ... therefore it is not an Owner's Draw by fact.
That leaves scenario 1 and 3 as possibilities.
Take a look at the next section in this chat on Employee Auto Allowances. Follow all the links there. Consider the following:
However, if it is more than that, here are some questions I might ask to help me make my judgement call.
Do you see where I am going here? You know what question(s) to ask. Sometimes sole proprietor's mix up the rules around employee mileage reimbursement with incorporated company rules or with their own reimbursement options. They all have different options.
IF you interact with the employees, can you create a mileage log sheet that you hand out and ask them to submit to you every month? Would it provide useful information or backup to the cheques? Would it be relevant?
IF you know where the employees go and when, do you want to create an ongoing log which would provide some backup in the event of an audit? Bing/Google maps are a great tool to calculate mileage from Point A to Point B. You need to ask yourself if this is in your job description if you are an employee or included in your engagement letter if you are self-employed.
I don't know the answers. I'm not there and don't know the dynamics.
You also want to familiarize yourself with the determining factors around issuing employees a Form T2200 Declaration Conditions of Employment at year-end?
Your responsibility is to do your due diligence. The owner is the one who will have to provide proof if audited. During an audit, he may be required to provide the backup documentation. If he couldn't, CRA could reassess him. The burden of proof is on the owner as we have a self-assessing tax system.
As a bookkeeper, you are going to have to use your best judgement. Sorry I can't help you more than that.
My response ...small business owners should be aware that due diligence is an audit defense, ignorance of the rules is not. Therefore it always recommended to have a business journal / appointment calendar to support your expenses. It assists in showing that the expense was incurred for earning business income.
The correcting entries required after an audit would depend on how the audit went and what points the auditor won. It definitely is not something you need to worry about right now. Just keep focused on doing your due diligence and using your judgement.
That would be no, No, NO! As I started the article with, employee vehicle expense reimbursement is a complicated area of the tax act. Instead of trying to find a way around the rules, it is much easier to just setup procedures that meet CRA's requirements.
1. Have the employee keep an auto log to track business trips in their personal vehicle and pay for their own vehicle expenses out of their pocket.
2. Have the employee submit the log at the end of each day, week or month and reimburse based on the CRA tax free mileage reimbursement rate. The rate includes wear and tear on their vehicle so they should have enough funds to repair their own vehicle if it breaks down.
If the employee doesn't have the money to repair their vehicle and you need them at work, then go ahead and pay for the repair (or maintenance) to the vehicle ... but keep the invoice and deduct the cost of the repairs from their next pay cheque. Ensure you have an agreement they sign when they start working for allowing to deduct these types of expenses from their pay cheques.
I was asked if an employer pays employees a mileage amount for work use of a personal vehicle, should this amount be included as employee income? For example if employee A is paid 50 cents per kilometer (km) by her employer and she drives a total of 1,000 kms in a year for work, should $500 be added to her taxable income?
If the auto allowance paid is within CRA's definition of reasonable, it is tax free to the employee. What is considered reasonable? See CRA's tax free auto allowance rates which are updated annually. The rates are tiered - one amount for km driven up to 5,000 km and a lower rate for over 5,000 km. The rates include GST/HST.
Anything paid over these amounts is a taxable benefit. Once it is a taxable benefit, CRA has an excellent chart which helps you determine if the taxable benefit attracts CPP, EI, income tax withholdings and/or GST/HST.
It is the employer's responsibility to ensure your employees keep an auto log showing their business mileage. To my mind, this means the employee should have to submit a copy of their log or expense report prior to reimbursement. The copy of the log should be attached to your copy of the payout as backup or kept on file.
I was asked how should the employee be paid for the mileage - is it paid via payroll for it to be included in the T4? If they are being paid lower than the prescribed rate, can they be paid through AP? How does the employer record this amount? What should the employer do for year end T4 slip?
If an employee met the CRA conditions for a vehicle allowance which is not a taxable benefit, it can be excluded from the employee's income. This means the employer doesn't need to deduct CPP contributions, EI premiums, and income tax from the employee's allowance amount.
It is my understanding that you should pay the tax free vehicle allowance on a separate cheque and not as part of payroll. If you do this, then there will be no problems when it comes time to issue the T4 slips at year-end.
Before you pay the allowance, ensure you receive an auto log or expense report from the employee to back up the amount paid.
A new freelance bookkeeper asked the following.
It is my understanding that if a sole proprietor's employees use their
personal vehicle for business purposes, they should be reimbursed an
auto allowance. There are published tax rate deduction limits for the tax-exempt portion of allowances that CRA considers reasonable. (The link was provided earlier in this chat.)
To support the allowance paid, it is my understanding that the employer should require their employees to keep and submit an auto log showing their business mileage. In my opinion no reimbursements should be made without the log and it should be kept on file in the event of a CRA audit.
It is also my understanding that if a company provides company cars to their employees, there are taxable benefits attached to it that must be included in payroll such as standby charges and vehicle operating expenses.
Your boss seems to have cherry picked how he handles reimbursement of the personal use of a business vehicle by an employee.
You should advise him to seek expert advice from an accountant. This is a complicated area of the tax act that is almost always audited because it is low hanging fruit.
On a go forward basis, I would at least try to get the boss to switch to a vehicle allowance supported with an auto log.
The construction material expenses should be entered as expenses ... however, the employees need to submit the original receipts as backup in the event of an audit. You can't properly enter your ITCs if you don't have the original statement. Credit card statements are not sufficient evidence that a business expense has been incurred.
A bookkeeper says that her employer is wanting to pay his employees 17 cents per km below CRA's auto allowance rates. What might be the minimum he could pay to avoid the CRA ruling that his per km rate is unreasonably low?
On the CRA site at Individuals> Tax return> > Deductions> Employment expenses> Salaried employees> Allowable motor vehicle expenses, there is mention of what an employee can do if they receive an unreasonably low travel allowance:
"Sometimes, your employer will include an unreasonably low allowance as income on your T4 slip even though you do not want to claim any expenses. When this happens, have your employer complete and sign Form T2200, or get a letter from your employer stating that the allowance was unreasonably low. Enter this amount on line 229 of your return."
In CCH's Preparing Your Income Tax Returns, I came across the definition of unreasonable for automobile allowances. It says two conditions must be met to be deemed unreasonably low:
"(1) the allowance is based on kilometers driven in the course of your employment. Presumably it follows from this requirement that you must keep a log ...
(2) No reimbursement for automobile use is provided in addition to your tax-free automobile allowance, other than reimbursement in respect of supplementary business insurance or parking, toll or ferry charges.
If your automobile fails to meet either of these tests, the whole allowance will be considered unreasonable and added to your income. In this case you may deduct your automobile expenses ..."
Marleen of BMCO Income Tax also weighed in on how to handle this. Here's her opinion:
In order for an employee to claim motor vehicle expense for business use
of their personal vehicle, their employer must issue a T2200. Question 2
on the form must be a "YES". Question 5 must also be answered.
As you are aware, motor vehicle allowances are non-taxable if:
1. They are paid based on mileage (a log was used and submitted);
2. The allowance was reasonable (did not exceed CRA's set rates); and
3. No reimbursement was given for operating expenses.
CRA's website clearly states at www.cra-arc.gc.ca> Individuals> Tax return> Deductions> Employment expenses> Salaried employees> that an employee cannot claim operating expenses for their vehicle if they have received an allowance. The allowance is meant to cover the vehicle operating costs.
If you go to CRA's Income Tax Interpretation Bulletin IT-522R Vehicle, Travel and Sales Expenses of Employees, and look under Allowance for Travel Expenses - General, you will see that CRA says in paragraph 41, "An allowance for travel expenses is not considered unreasonable merely because the employee's total expenses for business travel exceed the total travel allowances received in the year".
However, the T777 line 15 suggests otherwise as you pointed out.
If vehicle expenses were more than the allowance, you could try claiming them with the allowance reported on line 15 if the four conditions are met. (See the link above for the four conditions.) Earlier in this chat low km reimbursement was discussed and which you familiarize yourself with.
CRA may challenge you and you would have to provide documents and logic as to why you felt the employer's allowance was not reasonable.
Q. On my T2200 (section 5) my employer used a km rate 20¢ below CRA's published rate allowance. In section 7 of the T2200 it says I don't receive a reimbursement for repairs, expenses, bus fare or
1. Should I question my employer as to why I'm being paid 20¢ less than the normal rate?
2. Because I'm not getting the full CRA allowance amount, am I able to claim expenses, repairs etc even though I received the non-taxable allowance?
A. Check out low employee vehicle allowances.
E&Y's May 2013 newsletter states that "it is now the CRA’s view that in such a scenario the allowance received must be included in the employee’s income under paragraph 6(1)(b) of the Act. However, the employee may deduct from his or her income, under paragraph 8(1)(h.1) of the Act, automobile travel expenses" in respect of the total kilometers travelled".
This revised administrative position became effective on 15 July 2011. See CRA technical interpretation 2012-0454141C6 for more details.