Many small business owners are the only person in their business, or there is only one or two others. There are some specific rules that should be followed in order to make your life easier when using a personal vehicle and tracking those vehicle expenses.
- Always keep a log of km driven.
- This log needs to have the start and end km as per the vehicle odometer,
- the date of the trip, and
- the purpose of the trip. This means that if it was personal, just write “personal”. If it’s for business, write why (i.e. “Picking up office supplies at Staples”).
- If you’re a sole proprietor (or partnership), keep all of the receipts associated with your vehicle. This includes maintenance, fuel, supplies (washer fluid, etc.), insurance, etc.
- If you’re company is incorporated you don’t need the receipts, but it won’t hurt to keep them in a separate (personal) file.
- Whenever possible, double your trips. This means if you can run a personal errand (pick up milk at store, for example) at the same time that you are delivering a business package or meeting a client, then you can write the whole trip as a business trip. This is to your advantage!
- If you are registered for GST, don’t forget to separate out the GST from the base expenses and claim your GST input tax credits.
Proprietorship (and partnerships) use a percentage of the vehicle expenses each year to figure out how much the business expenses are. This is why there must be a km log and all of the receipts have to be kept (and added up). It’s the only way to accurately know what is business and what is personal. And the CRA can ask for this log in any audit, including a GST audit.
A corporation can claim (for 2012) $0.53 for the first 5000 km used in each driver/vehicle (it has been interpreted that if one driver is using two personal vehicles, the total is for the driver – this is something to be careful of). After the first 5000 km, the rate drops to $0.47 per km. Also note that this amount includes GST! This means that you can claim ITC’s for the GST portion of these km. Remember that while an expense reduces your taxable income by your tax rate, an ITC credit reduces the GST payable dollar-for-dollar, so they are more advantageous in that sense.
If you note the rules on this, a business can have higher vehicle expenses on a per km basis than if the costs are split. Since only corporations can pay for a personal vehicle on a per km basis, this is one of the advantages of incorporating.
Please note that these rules are for personal vehicles used for business! If an incorporated company owns a vehicle, there are different rules.
Questions? Contact us!