How To Deduct Automobile Expenses

hi everyone welcome to the real estate tax tips Channel my name is Cherry Chen a chartered professional accountant located in Oakville Ontario Canada a lot of people are asking me about questions on how to deduct automobile expenses well the reality is that the Canadian income tax act actually allows you to deduct any reasonable expenses that you incur for the purpose of earning property income or business income subject to a bunch of exceptions now automobile expenses a lot of us are using our car personal use vehicle for running employment purposes for earning business income or property income and therefore it is reasonable to establish that cost and effect relationship between incurring the automobile expenses and earning the income and therefore you are generally eligible to claim automobile expenses but how and what do you actually need to keep in order to order proof your deduction and we are going to dive deeper into that type of uh situation specific example to show you what you actually need to keep and The Traps that you may be stepping yourself into but before I get started make sure that you hit the Subscribe button below and give us a thumbs up if you find that our video is useful with that let's get started okay so before I get started I think it's important to reiterate the importance to make sure that you keep all the receipts regardless of what you are claiming in Canada it is important to prove your expense by keeping your Regional receipts Visa statement bank statements that track all your gas expense are not sufficient CRA only accept the actual receipts so for those of you who are having trouble keeping all your receipts sometimes it may be helpful to use a software or at least take a picture of the receipt immediately after you incur the gas expense make sure you take a picture some of you guys may be a little bit more advanced in terms of using App integration to do bookkeeping you may want to use hot dog or text another app or Qbo directly or even zero they all have the functionality to allow you to take a picture of the receipt immediately after you incur the expense to help you to avoid losing the receipt now that we get that out of the way let's talk about what kind of expenses that you would be eligible to deduct when you use Auto vehicle for the purpose of earning your employment income property income or business income for people who are having electrical vehicle you are eligible to claim any charging costs that you incur so there are lots and lots of charging stations everywhere these days you will be eligible to claim the charging charging cost and to a certain extent it's pretty helpful to to track your charging cost because there are lots of apps available every time I go to the charging station they all often require me to download the app and therefore I always have access to the uh to the receipts I don't even need to take copy of it I get an email receipt and I forward it to my hot dog account to keep track of my expense so charging cost is a deductible maintenance is deductible maintenance that would include your oil change your tire change any type of Maintenance costs that you incur so that would also be part of the deductible expenses uh auto insurance will be tax deductible as well license and registration right now in Ontario there is no more license fee in terms of registering your vehicle but if you have you are in the province that still has the license expense license fee then license and registration would be deductible and then there is any other expenses so for example CA membership is one of the examples for other expenses that's related to your vehicle that would also be technically deductible and then another example of the other would be a 407 in Ontario 407 ETR is the pay highway I often put my 407 ETR bill under the other section to for deduction as well and then on top of that you also eligible to deduct leasing costs and all capital cost allowance so if you lease your vehicle and you use at least vehicle for the purpose of earning your employment income or business income or rental income that leasing costs up to a maximum of 800 plus HST per month would be tax deductible now the way that they calculate the eligible leasing expense that you are eligible to claim is not really based on 800 and 800 the reality is it's really based on the purchase price of the vehicle the manufacturer listed selling price of the vehicle it is a Formula that could be found on cla's website and you have to go through the whole calculation to actually come up with the deductible eligible leasing cost amount you may have a vehicle with monthly lease of 750 dollars it's below the maximum of eight hundred dollars because of how the formula is calculated in terms of what it could be eligible for deduction the actual amount being deducted could be 600 so if you really have to go back to the actual calculation and actual formula as specified on the income tax act to come up with the eligible leasing costs that are deductible if you own the vehicle directly you would be eligible to claim something called Capital cost allowance of the vehicle now when you purchase a vehicle you would be paying maybe a hundred thousand dollars maybe fifty thousand dollars maybe eighty thousand dollars uh vehicle pricing these days are crazy no matter what you pay for if it is a regular vehicle regular vehicle that's not an electric vehicle that qualifies and meet the definition in clas in the income tax act a regular vehicle even if you pay a hundred thousand even if you pay ninety thousand dollars for a Ford truck the that vehicle is you the maximum you can claim is thirty thousand dollars plus HST so you may pay seventy thousand dollars plus HSC but you can maximum you can claim under Capital cost allowance is thirty thousand dollars plus HSC and the capital cost allowance is really calculated based on on the depreciating declining basis so the first year you get the maximum deduction but not thirty thousand is thirty thousand dollars times thirty percent and then it gradually goes down every single year in the case of the electric vehicle the first year that you can claim is 55 000 plus hsd multiplied by the business use and then in the future year if you claim the 455 in the first year then there is nothing to be claimed in the following years so it gets a little bit more complicated when it comes down to lease versus purchase I have a different video for you to compare leasing versus purchasing a vehicle as well so you can visit and watch that video to make sure you get the jits of whether you should at least versus buying a vehicle last but not least um there is also parking expense so parking expense is eligible for deduction parking is related to a vehicle so I put it down here but the reality is that parking expense is only eligible for deduction if the parking is incurred directly for the use of running your business or employment purpose now let me use an example to explain if you take your parents to an Italy trip and you take your you drop your parents off at Toronto Pearson International Airport and you incur parking because you're dropping your parents off and they're flying off to Italy and you incur the parking cost that parking cost is not deductible at all 100 personal and therefore no deductibility allowed now on the other hand if you're a real estate agent and you're taking your coins around downtown Toronto and you incur 32 dollars to take your clients to show a particular Condo building in Downtown Toronto and that 32 dollars or thirty dollar parking cost would be 100 deductible so that's where the difference is coming in from parking is 100 deductible but only to the extent that the parking cost is incurred for the purpose of earning that particular income so these are all extremely important to make sure that you keep all of the receipts so that you can order prove your deduction now that we've covered what could be potentially deductible in terms of expenses the CRA is also very fair very fair in terms of what you allow for deduction they're not going to allow you to deduct the entire cars expenses especially for the ones that are using their vehicle for both personal use as well as business use and employment use so you're only eligible to claim the business use percentage of the vehicle now the key here to calculate the business use percentage or employment use percentage or rental use percentage of your motor vehicle the key is auto lock you are required to keep an auto log book in that auto law book would need you to log all the mileage that you occur for the purpose of going around for employment purpose business Purpose Rental purpose so now let's use an example to illustrate the kind of information that you really need to document in your auto logbook so let's say on October 28th you are driving to Toronto from your home to see a client and from your office or your home to see a client and that's about that trip is about 50 kilometer now so in your logbook what you will have to do is to lock down the date which is October 28th the destination is the exact address let's say it's one two three ABC Street in Toronto so you have to write down the exact address and then the purpose is to meet clients I would go as far as documenting the name of your client let's say it's Peter and then the number of kilometer driven as mentioned in my example is 50 kilometer so this is the type of detail of information to the extent like the extent of the information that we have to keep track for every single entry that we do every single trip that we take of course if one trip is 50 kilometer you would have to come back to your home base or business base and it would be another 50 kilometers so you made one or two times two so it's equal to 100 kilometer now so let's say odometer reading at the end of the year is 22 000. at the beginning of the year you just purchased this car so realistically between personal and business uh use of the vehicle you've driven 22 000 kilometer for the full year now let's say you did a hundred of these trips a hundred of 100 kilometer business trip if that's the case you take a hundred kilometer times 100 trip 100 business trip the total the total kilometer driven for business purpose is about ten thousand ten thousand kilometer okay so this is based on your log book the actual day you need to provide the actual day the destination purpose for every single 100 kilometer trip that you take you've taken but in my example I just simplify everything I just said that hey like I visited the same client for the last a hundred times during the year every few days I visit the client and that incurred ten thousand kilometer in total for business purpose and so that 10 000 kilometer is the business use of the vehicle so what CIA would do is that they take the 10 000 kilometer divide by the 22 000 kilometer that you've driven for the full year uh the combination between personal use and business use and prorated so 22 000 ten thousand divided by twenty two thousand and that would be the amounts that you would actually be able to deduct multiply the probation the percentage would be what you have to so about 45 of all of the expenses that we mentioned earlier so your gas your maintenance your uh your insurance your your CCA Capital cost loans or your leasing costs would be tax deductible okay let's go through all of these combined all of them together and see how we actually come up with the actual deduction amount for auto vehicle expense now um in our previous calculation we come up with the business use percentage of your motor vehicle as 45 we came up with it by calculating the business use percentage the business use kilometer which was calculated as 10 000 kilometer divided by 22 000 kilometer which is the total kilometer you've driven for the whole year for that particular vehicle and if you have multiple vehicle by the way you have skip two lockbox so one for each vehicle if you have like three vehicles you have to keep one for each of them so it's important and also as an other tip the motor vehicle the mileage that you've driven between your home and the office is not tax deductible so as an example if you have a permanent office in an office building in Mississauga say and you live in Oakville and the mileage that you drive every day from your home to your office and from your office to home is not tax deductible now on the other hand if you are operating from your home you don't have any other office establishment anywhere else as an example for a real estate agent who doesn't have an office in their brokerage that they belong to they operate primarily from their home and they see clients in the properties their home would be then their office and every time they drive out to see clients everything is tax deductible if they have to go to the brokerage to pick up a check or see the broker of record that mileage would also be tax deductible so it's very important to distinguish the two if you don't have a permanent office that you would likely be able to claim demolition mileage that you've driven from your home to the office it goes back to your particular situation now that we clarify all that we can get back into our example now the business news percentage is 45 as we calculated before as we mentioned really early in our example you can deduct gas maintenance Insurance gas or charge cost of charging gas maintenance insurance license and registration and other expenses such as CAE membership and then the leasing cost or Capital cost allowance and in our this particular example I came up with all the numbers these are annual numbers uh you are really supposed to have real numbers so you are you are supposed to add up all your guest receipts to come up with this number they are not supposed to be round number for the purpose of today's presentation I'm only using round number here for the actual deduction you're supposed to come up and add up all your receipts because I have clients who gave me round number on all the deductions and immediately I know something's wrong so for gas let's say this person incurred three thousand dollars for the year maintenance 700 Insurance sixteen hundred dollars uh there's no license and registration because Doug Ford gave us a brick so there is no cost um and then this person also bought a CAA membership for 500 so in uh and then this person also leaves the vehicle and after going through cla's calculation the eligible leasing expense deduction is seven thousand two hundred dollars and now if you add all these expenses up the total expenses for the vehicle operating cost of the vehicle is 13 000 dollars for the four year now because we know that this particular taxpayer only drove 45 percent of the time for the purpose of running the business and therefore only 45 of that thirteen thousand dollar total is tax deductible so applying that 45 to 13 000 you can see that the actual deduction is five thousand eight hundred and fifty dollars so not the full thirteen thousand dollars amount it's only five thousand eight hundred and fifty dollars now we've gone through the Practical example of how we would use to come up with a tax deduction amounts to offset against your income in terms of filing taxes and the um determining the actual amount of automobile expenses that you would be able to deduct um there are a few common questions that I often get especially on the YouTube channel if you have questions make sure that you leave in the comment section below so then I can make sure that in the future videos that I produced I would be able to cover some of these questions now the first common questions that I get is hey like what if I'm employed if I'm employed and I'm using my car to run around to visit my clients and to uh visit client site or see prospective suppliers am I also allowed to deduct the expenses am I also allowed to go through the calculation that you just went through to deduct against my employment income well first of all if you are an employee the deduction is pretty much similar assuming you qualify there are a few criteria that you do have to qualify you if you're an employee you're you're often required in your employment contract you are required to regularly use your vehicle to travel between your office to your client's site so it has to be specified in the employment contract you also need to get something called a t2200 essentially it's a form that's filled out by your employer that would prove and declare that you are using your vehicle for the purpose of running around to for your employment now if you get reimbursed sometimes the employers do reimburse the employee for the use of their vehicle if you do get reimbursed then the reimburse amount has to be offset against the amounts that you are deducting so let's say in my example it's a the amount that you were able to deduct was about fifty seven hundred dollars and you receive a thousand dollars from your employer as in reimbursement the one thousand dollars would be offset against the fifty seven hundred dollars and you are only eligible to claims four thousand seven hundred dollars on your personal tax return so it makes a difference you know the amount that you get reimbursed by your employer would be used to offset against the deduction that you take so it's important so you can still go through the calculation that we went through but you have to be careful in terms of the documentation and the amount of reimbursement that you receive to make sure that you are complying with all the income tax act the next question that I often get is if can you use something called a mileage allowance to claim against your employment business or claim against your self-employed business or your corporation while the reality is that see how it did come up with the mileage allowance that are reasonable and in 2022 for the first 5 000 kilometer that you've driven for the purpose of earning business income or employment income for a corporation or rental income you can claim up to 61 cents per kilometer it's reasonable amount you would then not be required to claim that 61 cents per kilometer driven as your income when you receive the money as a reimbursement that is a reasonable amount for anything over the first 5 000 kilometer right now is sitting at 55 cents so the calculation vary depending on the actual kilometer you've driven for the purpose of earning that income now so the question is hey Cherry instead of going through all the calculation that you've gone through keep track of all the as receipts maintenance record insurance and all these extra receipts that I have to do can I just keep the logbook and then multiply by the mileage allowance and claim it against my self-employed business as a sole proprietor or can I use that my auto logbook and claim it against my corporation that runs my business now the easiest answer with is with your corporation if you runs your business through a corporation and you're trying to get reimbursed for using your vehicle to run the business for the corporation you can use that mileage allowance that's specified on cra's website and every year that number change and you would be able to use that mileage allowance you would still be required to do the auto log book that I mentioned earlier all you need to do is take that 10 000 kilometer that we've calculated and then multiply by the appropriate number 61 cents for the first 5 000 kilometer and 55 cents thereafter if you are running your business as a sole proprietor CRA doesn't really necessarily say that you could use that same mileage allowance to claim as automobile expenses typically on the CRA prescribed form it has the auto automobile expenses listed in detail including gas maintenance license registration Insurance everything so in other words there is no specific rule that allows you to use the allowance it's not saying that you're not allowed to do it it's just that there is no specific rule so on a conservative side I would always go for the detail method keep track of all your guest expenses keep track of all your insurance expense keep track of Maintenance expense and all the receipts everything that's related to claiming the automobile expenses if you run your business in your personal name okay last but not least as a lot of Real Estate Investors out there real estate investing is one of their side hustle you may also run a sole proprietor business you may be a self-employed a realtor or you may be a doctor and have a few rental properties if I use my vehicle to run multiple businesses how do I keep track of that violation and how do I claim the expenses well the reality is the magic happens where the auto lock is so in your auto lock you're required to document the purpose of each trip and when you do the trip when you log all your business is used let's say you have a business one business self-employed business and then you also have a couple of rental properties and on your auto lock boat you will divide the log based on or document your travel your trip based on business use versus rental use and from there only a percentage is deducted against your business only the business use percentage is deducted against the business income and the rental use percentage is deducted against the rental income people would ask well what if I use my vehicle for like my sole proprietorship my rental properties that I hold personally and then I also have properties that I own in my Corporation then again the magic happens with the auto lock you just document it and then at the end of the year you sum it all up for different purpose and you claim the expenses accordingly now that we've covered everything under the sun with respect to claiming automobile expenses if you have any questions like I mentioned before make sure that you leave it in the comment section below because I know a lot of you would be confused and if you have any questions I'm happy to answer them in the comment section below if you have questions and on buying versus leasing a vehicle make sure you visit my other video here's the link and you would find a lot more in-depth analysis in this particular vehicle if you're interested in buying Tesla altogether there are two videos that I did earlier to show you the benefit the tax benefit of buying an electric vehicle or a clean vehicle per se if you find this video useful make sure you give us a thumbs up and share it with your friends make sure you also hit the Subscribe button to stay on top of the latest text tip until next time thank you for watching

Channel: RealEstateTaxTips

Views: 16,749

Keywords: Real Estate Accountant, Real Estate Investor, Real estate agents, Small business owner, Tax Planning, Tax Tips, Tax Advice, CRA, Canadian tax, Tax Returns, Tax Deduction, Deduction, Personal Income Tax, Corporation, Corporation Tax, Marginal Tax Rate, investor tips, Real Estate Tax Tips, Cherry Chan

Id: 8PsWQ1NeHgQ

Length: 24min 52sec (1492 seconds)

Published: Fri Dec 02 2022