Deduction of Automobile Expenses

What is the best way to deduct car expenses?

Our accounting firm often get asked tax questions from our clients located in Vaughan and throughout the Greater Toronto area on what is the best way to deduct automobile expenses. Your options are to either buy/lease a car through a corporation, or buy/lease it personally. There isn't a best answer; it depends on the number of facts. We summarized the general information regarding each method.

Scenario 1. Business owner owns or leases a car personally.

This may be the easiest way to claim deductions. Your corporation will reimburse the owner for each business kilometre driven for a business purpose. The compensation rate in 2018 is 55 cents/km for the first 5,000 kilometres and 49 cents/km thereafter.

Example: A person drove 13,000 km for a business purpose in one year.

5,000 km * .55 cents = $2,750

8,000 km * .49 cents = $3,920

Total 13,000 km            =$6,670

In this example, $6,670 is the deduction that the corporation will claim for the car expense reimbursement to employee or shareholder. The corporation will issue a cheque for $6,670 to the shareholder. The money received by the person is not taxable income.

All car related expenses (i.e. lease or loan payments, gas, insurance, repairs and maintenance and etc.) are to be paid by the business owner from personal funds.

It does not matter whether the person owns or leases an expensive car or drives a cheap used vehicle. The same compensation rate per kilometre is used – 55 cents / 49 cents.

In case of the CRA audit, you have to provide a mileage log that supports the business kilometres driven.

Scenario 2. Corporation owns or leases a car

In a situation where a corporation leases or purchases a car, all car related expenses are paid by the corporation and a taxable benefit is allocated to the business owner for the personal use of the vehicle.

Taxable benefit is the notional amount which is added to the individual's taxable income and it is subject to income tax. Taxable benefit depends on the number of kilometres driven for personal use and the cost/lease of the car. Keep in mind that your commute from home to your place of work is generally considered personal travel. Taxable benefit may result in a few thousands dollars added to the individual's income. Mileage logs must be presented to the CRA in case of audit.

Also, depreciation and lease expenses are restricted to certain threshold amounts.

Company owns a car

Cost limit for depreciation purposes is 30,000 before HST. For instance, if a com