Vehicle allowances and deductions can put you on a collision course with the taxman
Automobile expenses continue to be an area of scrutiny for the taxman, so you shouldn't be surprised if the Canada Revenue Agency starts asking you questions about how you may have claimed any vehicle expenses or employer's travel allowances on your tax return. Indeed, two recent tax cases decided over the summer dealt with employees and their cars.
The general rule
As a general rule, if you're an employee that needs to use your car for work, you may be able to deduct some of your automobile expenses on your tax return, but you must meet certain conditions. First, you must normally be required to work away from your employer's place of business or in different places. Second, under your contract of employment, you must be required to pay your own automobile expenses and this must be certified by your employer on a signed copy of CRA Form T2200, Declaration of Conditions of Employment.
Finally, to claim vehicle expenses, you must not be the recipient of a "non-taxable" allowance for motor vehicle expenses. An allowance is considered to be non-taxable when it is based solely on a "reasonable" per-kilometre rate. For 2018, the CRA considers a reasonable rate to be 55 cents per kilometre for the first 5,000 kilometres driven and 49 cents/km after that. In the territories, the rate is 4 cents/km higher.
If your employer does reimburse you but you feel that the amount you are reimbursed was not reasonable to cover your actual operating costs of your vehicle, you can deduct the "work" portion of your actual vehicle operating expenses provided any employer vehicle allowance paid to you is included in your income. Since most employees use the same vehicle for both employment and personal use, to support the amount you can deduct you should keep a record of the total kilometres you drove during the year and the kilometres you drove to earn employment income.
In each of the two cases decided this summer, the court examined whether an allowance paid by an employer was reasonable.
The construction worker
The first case involved a Toronto construction worker employed by a construction company who was expected to transport himself to various work sites daily. According to daily entries in his three yearly logs, the taxpayer's daily travel by car during this three year period included frequent travel to Hamilton and return (logged as 167 km daily), to Aurora and return (logged as 92 km daily) and infrequently to Whitby and return (logged as 94 km daily).
The taxpayer was reassessed by the CRA for his 2010, 2011 and 2012 taxation years during which years he sought to deduct motor vehicle expenses totaling $11,000 in 2010, nearly $12,500 for 2011 and approximately $12,000 in 2012.
The taxpayer's employer signed the requisite Form T2200s for each of the three years in issue and on each one reported that a "fixed" motor vehicle allowance, "annotated by the employer as being 'non-taxable,'" had been paid to the taxpayer in each of 2010 ($1,385), 2011 ($3,550) and 2012 ($3,810). These amounts were calculated based on the destinations travelled rather than directly on the basis of kilometres driven.
The judge concluded that since the allowance "was a so-called 'fixed allowance'," it was not considered reasonable as it was not determined "solely (on the) number of kilometres for which the vehicle is used (for) ... employment."
Based on this, one would have thought the result would be that the taxpayer had to include the fixed allowance in income and could proceed to deduct his vehicle expenses. But, oddly, the judge denied the taxpayer's vehicle expense deduction, either because the judge simply made a mistake interpreting the law or perhaps the judge concluded that since the taxpayer didn't include the allowance in his income, the taxpayer couldn't avail himself of the deduction.
Snow removal services
The second case involved a taxpayer who worked for a snow removal company that has a number of snow and ice clearing contracts with various institutions in Barrie, Ont., such as the town hall, the police and fire departments, schools, churches and other municipal and commercial locations. The contracts include clauses committing the company to perform daily and nightly "snow runs" to monitor where within the area snow and/or ice clearing is required. The distance of the snow run fixed route was approximately 92 kilometres.
Snow runs were done as needed, sometimes one, two or three times a night and also as deemed needed during daytime hours. No records were kept either by the employer or anyone else of the number of snow runs done during any particular 24-hour period.
The snow runs were done by the taxpayer using his personal vehicle for which he was paid a fixed allowance of $9,100 annually in 2012 and 2013, paid in installments of $350 every two weeks of the year, rather than only being paid during the winter season "for cash flow purposes of the Employer."
Apparently, the $9,100 figure was picked by the employer's accountant, who had recommended it "based on some averaging calculations as to (the) likely number of snow runs driven in any given year."
The taxpayer did not report the $9,100 annual allowances on his tax returns "thinking it was wholly deductible anyway." The CRA disagreed and reassessed on the basis that these payments were not "reasonable" vehicle allowances as they were not based on the number of kilometres driven and therefore had to be included in his income.
The taxpayer argued that the payment should be considered "reasonable" as he knew the specific distance of each snow run (92 km) and the total payment was based on an average of the number of snow runs driven.
Thus, the issue in the case came down to whether the annual $9,100 payment was a "reasonable" vehicle allowance and thus could be excluded from the taxpayer's income?
The judge found that the vehicle allowance paid by the employer to the taxpayer does not qualify as being "reasonable" and hence exempt from income inclusion because the amounts paid were not determined based solely on kilometres actually driven. As prior jurisprudence concluded, "an estimate was not good enough to constitute a reasonable vehicle allowance." The amount of the allowance had to be based on "actual kilometres travelled rather than an approximation."