Article February 12, 2020

Your employer's car allowance and deductible expenses

David Truong, CIWM, Pl.Fin, M.Fisc., Banque nationale, Gestion privée 1859

When an employer pays you an allowance for the use of your personal vehicle as part of your job, this allowance is generally taxable unless it is calculated exclusively based on a reasonable rate per kilometre (this rate is subject to an annual ceiling of 59 cents for the first 5,000 km travelled and 53 cents for each additional km).

However, sometimes that allowance is not enough to cover your costs and wear and tear on the vehicle. As an employee, it is possible to choose to have this allowance taxed and deduct motor vehicle expenses on your tax return.

Deducting vehicle expenses

According to paragraph 8(1)h.1) of the Income Tax Act, employees can deduct expenses for a motor vehicle used for their employment if the following conditions are met:

-          They are usually required to work outside the employer's establishment or in different locations

-          They must pay their own vehicle expenses in accordance with their hiring contract

-          They did not receive a non-taxable allowance for their vehicle expenses.

Employees can have more than one usual place of work. The mere fact that an employee works more frequently in one location than others does not prevent other locations from also being usual places of work.

Moreover, in order for employees to be able to deduct vehicle expenses, they must receive a signed T2200 form from their employer attesting to their work conditions. It does not need to be included with the income tax return, but must be available upon request.

What expenses?

Expenses differ depending on whether you own or lease your vehicle, but in both cases, they are limited based on the distance travelled for your job out of the total distance driven for the year.

Let's take the example of an employee who drives 15,000 km in his own car over the year for his job out of a total of total of 20,000 km. If all the previously identified conditions are met, he can only deduct 75% of his total expenses.

-          If you lease your vehicle, the deductible expenses are operating costs (fuel, maintenance, repairs, licence, insurance, etc.) and lease expenses[1]. The maximum authorized deduction for lease expenses is $800 per month plus sales taxes.

-          If you own your car, deductible expenses are operating costs, depreciation and interest on the loan, if applicable. The maximum deduction for depreciation is equal to 30% (except the first year) of the undepreciated capital cost. Previously, the capital cost was limited to class 10.1, or $30,000, but if you purchased an electric vehicle after March 18, 2019, you can use class 54, or a higher capital cost of $55,000. Consequently, your deduction for depreciation can be higher. Interest is also subject to a maximum amount of $10 per day.

In both cases, the amount of vehicle expenses that you can deduct is limited to your employment income. You cannot apply these expenses to other income or create a loss. If you cannot deduct all expenses for the year in question, they can be carried forward to the following year.

Travel log

If you decide to deduct vehicle expenses, be sure to keep a detailed log of your travel and the mileage at the start and the end of the year. There is no template format, although the log should include the date, distance travelled, reason for travel and whether the travel was reimbursed. This log must always be available upon request by tax authorities.

Finally, note that travelling from home to a workplace is considered personal use and cannot be used for a deduction.

[1] (Actual lease expenses + taxes) × ($30,000 + taxes on $30,000) 85% of the manufacturer's suggested retail price, without taxes (minimum $35,294 + taxes on $35,294)