Do you have to pay tax on car allowance you receive from your employer? Not necessarily!
Over the years we have found that there is a widespread misunderstanding among Small Business owner-managers and employees alike when it comes to tax treatment of automobile expenses. In this blog, we try to shed light on the rules associated with the use of an employee’s owned car in work-related travelling.
The general rule is that if you are an employee of an organization, including your own wholly or partially owned corporate business, and you use your car for work, then under certain conditions, you may be able to deduct some of your automobile expenses on your tax return.. The conditions that must be satisfied in this regard are:
- You must be required under your employment contract to pay your own automobile expenses and this must be certified by your employer.
- As a matter of routine you must be required to work away from your employer’s place of business, and
- You must not be the recipient of a “non-taxable” allowance.
Tax deductibility of car expenses depends on terms and conditions of the employment. The terms and conditions of employment with respect to use of employee’s personal motor vehicle is confirmed by the employer on form T2200.This form provides important information about the conditions of employment and confirms if all above-noted conditions are satisfied. It should be noted that employees can deduct vehicle expenses only to the extent that such expenses weren’t recovered through receipt of allowances or reimbursements.
From taxability perspective, there is also non-taxable allowance that an employee can receive on account of his or her use of own car for work related travel. The rules concerning non-taxable car allowance are less stringent in practice and are totally independent of the terms and conditions of employment.
A Vehicle Allowance is the money an employee receives from his or her employer on a regular basis, in return for the business use of the employee’s owned motor vehicle. Such allowance is taxable to the employee as regular income. Such taxable allowance, in some cases depending on the terms and conditions of employment, can be offset by claiming car expenses on the employee’s tax return.
A Kilometer Allowance, also referred to as mileage allowance is not taxable and constitutes monies that an employee receives for taking employer’s related business trips in his or her owned car. While this non-taxable allowance is available to any employee but it must be calculated based on a “reasonable” per-kilometer rate. For 2019, Canada Revenue Agency considers a reasonable rate to be 58 cents for the first 5,000 kilometers and 52 cents per kilometer for anything in excess. In the territories, the rate is 4 cents per kilometer higher.
Kilometer Allowance is to cover operating expenses of the car consisting of insurance, gas and oil, repairs and maintenance, registration and license fees, lease payments, car loan interest payments, and Capital Cost Allowance. However, to ensure the allowance remains non-taxable, it is important that employees accurately record the vehicle’s odometer readings at the beginning and at the end of each calendar year. Employees are also required to keep a logbook showing the date, the starting point, the destination, the purpose, and the number of kilometers for each trip they take for work.
It is possible that the work-related cost of traveling exceed the non-taxable allowance received. In such cases employees can claim the excess on their tax return using CRA form T777.
All content provided on this blog is for information purposes only. Master Accountants does not in any way whatsoever, guarantee , warrant or otherwise make any representation as to the accuracy, completeness, or usefulness of any of the information contained in this blog regardless of how the reader obtained access to it. Master Accountants will not be held liable for any errors or omission in the information presented nor for any loss that may result from the application of this information. The reader is strongly advised to consult his or her professional accountant and NOT to rely on this information.