Do you drive a car for business purposes? If so, be aware that, come tax time, deductions can be made under various circumstances. When filing your taxes, the type of business and ownership of the car play a key role in determining what needs to be done for the CRA. Additionally, many folks tend to forget that the type of vehicle you choose will affect your taxes.
If all of this sounds overwhelming, don’t worry! At Envolta, we know the importance of optimizing your return to coincide with personal or company vehicle use, as the submission requirements for both can differ in unexpected ways. Today, let’s walk you through some critical points of tax implications for company-owned vehicles and spotlight tips to help you handle your taxes more effectively.
Let’s look at the three tax-related scenarios you may find yourself in when using a vehicle for business:
Vehicles and Sole Proprietorships
When you operate a sole proprietorship, there is no distinction between yourself and the business. Therefore, when driving your car, you are driving both a personal and business vehicle. With that said, what does this mean come tax time? As it turns out, all you are required to do for the CRA is to track your mileage and expenses, which is a pretty straightforward process!
When tracking your mileage, follow these steps:
- Take an initial odometer reading on January 1st.
- Use a GPS-enabled app to track the mileage of each business trip throughout the year.
- Take a second odometer reading on December 31st.
- Find the ratio of business to total miles.
When doing your taxes, this ratio will play a major role in determining your deductibles.
Other critical pieces of information include receipts, whether fuel, maintenance, car washes, registration, insurance and other similar forms of documentation – every bit of data helps! These will be essential in calculating taxes with accuracy, avoiding unwanted surprises later on.
How Do I Calculate My Taxes?
If you’re new to running a business and need help in completing an accurate tax return, it’s best to work with a trusted, experienced accounting firm to ensure sufficient, correct information is included. Envolta is happy to help with a free initial consultation!
Regardless of how you choose to complete your tax forms, know that your deductions are likely to be in your favour here. As a sole proprietor, you likely own your own vehicle, the capital value of which will be a focus when performing subsequent calculations. Unique to sole proprietorships, this specific value will play a role in determining your deduction amount. Often, it will be 10 percent of the capital value per year (less any deductions in previous years). That amount is then prorated using the same mileage ratio previously mentioned above.
It might seem like a lot of work, but the process is relatively simple and effective – plus, it’ll be worth it to see your tax deduction amount!
Personal Vehicles and Corporations
Unless the vehicle in question is being used almost exclusively for business, for tax purposes, it’s best to own it and expense business use to the corporation. However, when using your personal vehicle for business purposes, you need to ensure the mileage is recorded correctly. This helps to ensure you get the tax deduction amount you rightfully deserve, plus you can avoid unexpected costs more efficiently!
So, how do you keep tabs on your mileage? The answer is simple: A mileage log – one that won’t get lost and is clearly legible (if your writing isn’t exactly the most decipherable, using a tablet with pen input or a laptop is a great workaround). This way, you can record every business trip you take with greater accuracy. Technically speaking, the total mileage per year is somewhat irrelevant, as the CRA allows a per-mile rate to be reimbursed to employees, tax-free. This rate is capped but the ceiling is high, making it very unlikely that you’ll go above the cap within the fiscal year.
Our experienced accountants praise this approach as the best option for most employees, given its straightforward nature without requiring such a lengthy process to complete. That way, you can complete your return effectively without sacrificing efficiency!
Company Vehicles and Corporations
This approach pertains to circumstances where the car is owned under the corporation’s name. While this looks like a logical step to take, it introduces some complications along the way. In fact, through our experience in helping Envolta clients make sense of their taxes and confirm their deduction amounts, we’ve found several implications involved with company-owned vehicles that can make for a tedious, time-consuming process.
The first of these complications involves classifying the vehicle for tax purposes as either a motor or passenger vehicle. These classifications have the biggest impact on determining the available deductibles. A motor vehicle is more work-oriented with fewer restrictions on the deductible, making it the ideal choice. A passenger vehicle, on the other hand, has stronger restrictions on the total amount deductible for a lease, or in the case of ownership, the capital amount deductible.
Let’s focus on the personal use of a company car as an example. This personal use can be considered a taxable employee benefit, and even if you are a business owner, you’ll still be taxed as an employee in this instance.
Operating Cost Benefits vs Standby Charges
When looking into the personal use of the company car, there are two types of taxable employee benefits: The operating cost-benefit and the standby charge. The former calculates the total expenses saved on running the vehicle due to the company paying for all associated costs. This benefit is calculated according to your personal mileage on the vehicle during the year, and it’s reduced by any amounts for which you reimbursed the company.
Standby charges work a little differently. They occur when the company has a vehicle available for use at any time. This is calculated based on the amount of mileage you put on the vehicle personally, whether a motor or passenger vehicle, the value of the vehicle, and the number of months it was available to you.
Are you wondering how to calculate these benefits? The process is actually pretty extensive, and it can be overwhelming to those unfamiliar with it. As each benefit is calculated using a specific CRA formula, allowing employees to be taxed personally, it’s best to leave these calculations to the experts. Better safe than sorry!
When all is said and done, we don’t recommend purchasing a company vehicle unless it will be used almost solely for business purposes. In most situations, as an employee, you’ll be much better off driving your personal vehicle and expensing your company for business endeavours!
In order to determine which option best suits your needs, it‘s a good idea to have a professional calculate this for you. At Envolta, we can help you find ways to minimize tax implications on these benefits and much more! Our team of accounting professionals specializes in both personal and corporate taxes, and we know the appropriate steps to take in tax planning, regardless of your needs. Contact us today to get started with a free initial consultation – we’re happy to help!