Self-employment has the benefit of being able to leverage many day-to-day business expenses when filing taxes in Canada. One of these expenses being motor vehicle expenses. I have discovered that far too often at the time of inception of a new client who is self-employed and running a small business; that they are either not tracking their mileage at all as they are not aware that they can claim this as an expense at tax time—OR—are not doing so correctly.
Here is some valuable information that will help set small businesses and self-employed individuals up for success at tax time.
The Canada Revenue Agency (CRA) allows a self-employed person with self-employed income to deduct expenses based on the number of kilometers used in their vehicle for business-related activities when filing taxes in Canada.
The best way to track the mileage used is by utilizing a full logbook. This acts as evidence to support the use of a vehicle for business related expenses and it outlines each business trip, the destination, the reason for the trip and the distance covered.
In addition to mileage, self-employed individuals are able to deduct motor vehicle expenses when they are deemed reasonable. Make sure that receipts are kept to support these expenses! Keeping a record of the total kilometers driven and the kilometers driven to earn business income is crucial if you are self-employed when filing taxes in Canada.
For each business trip, keep a record of the:
- Date
- Destination
- Purpose
- Number of kilometers driven
In addition to keeping track of kilometers during business trips, make sure that you are logging the odometer metre at the beginning and end of each fiscal period. Note: If you change motor vehicles during the fiscal period, record the dates of the changes and the odometer reading when you buy, sell or trade the vehicle.
After maintaining a full logbook for one year, the CRA allows self-employed Canadians to use simplified logbooks in subsequent years. A simplified logbook is a three-month sample logbook that can be used for the entire year, as long as the usage lays 10% of the full logbook aka “base year”.
The business use of the vehicle in the following year is calculated by:
(Sample year period % / Base year period %) x Base year annual % = Calculated annual business use
Note: Where the calculated annual business use in another year is different by more than 10%, the base year is not deemed an appropriate indicator of annual usage. Therefore, a simplified logbook would only be reliable for the three-month period if had been maintained.
Keep records and supporting documents that support the 12-month full logbook for six years after the end of the tax period of the full logbook. In addition, if there is more than one motor vehicle for a business, make sure that a separate record displaying the total business kilometers driven and the cost to run and maintain each vehicle is kept.
Now, to calculate the mileage deduction for a business, the following will need to be determined:
- The total kilometers driven during the year
- The total kilometers driven for business purposes
Bonus?
In addition to mileage expenses, the CRA allows self-employed Canadians to add other vehicle expenses to the total motor vehicle deduction. This includes:
- Fuel
- License and registration fees
- Insurance
- Lease expenses
- Maintenance and repairs
- Interest
- Depreciation
Like the mileage expenses deducted, only the costs associated with business travels can be claimed. For some expenses, such as repairs and maintenance, it may be hard to determine the costs directly related to business use. In that case, the percentage used in the mileage calculation will need to be applied to these costs.
Motor vehicle expenses can be used to one’s advantage when filing taxes in Canada if self-employed with proper tax preparation planning in place.
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