Many of our clients are confused with how the vehicle expense deduction works. Please note that we usually refer to it as a ‘mileage deduction’, even though we use kilometres… we’re weird like that.
How Does Mileage Deduction / Vehicle Expense Deduction Work?
Any corporation can reimburse you, as an employee, on a per-km basis.
This reimbursement is tax-free to you, to a maximum of $0.61/km for the first 5,000km’s and $0.55/km thereafter (in 2022).
Note that the rates usually change annually.
Tracking & Submitting Mileage Deductions
All you need to do here is track your mileage and submit it to your employer.
All of your vehicle costs are paid out of your own pocket and unless the per km reimbursement is unreasonable (say $0.10/km), you are not allowed to deduct any vehicle costs that you paid personally, because you got a tax-free reimbursement from your employer to offset the costs.
This is often the most advantageous and efficient way for an owner of their own corporation to reimburse themselves for their vehicle usage.
Monthly Allowance For Mileage
On the other hand, if you are an employee, and your employer requires you to drive your own vehicle for work purposes (gives you a T2200), but doesn’t reimburse you on a per km basis like above, (say they give you a monthly allowance of $500/month instead), then things work differently.
This monthly allowance is included on your T4 slip and therefore added to your total taxable income.
However, to offset this, you can deduct your actual vehicle expenses from your taxable income.
How Much Do I Deduct For Vehicle Expenses?
The amount to deduct is based on your total vehicle expenses, multiplied by the number of business km’s / total km’s.
This is referred to as an employment expense deduction. You still have to track your mileage, but it works a bit differently. You have to now track your total mileage for the year AND your business-use mileage for the year.
You can use our template to help calculate this
Self-employed people would also have to track their mileage and all vehicle expenses the same way as above. They take all of their vehicle costs and prorate by the business use mileage over their total mileage.
What is Considered Business Use?
Well, this is not an easy question to answer, but basically, it is NOT to and from your work, or what is referred to as your regular place of employment – CRA considers that personal-use.
However, if you go to your office, and then out to a client, or vice-versa, that is business-use.
If you drive directly to a client’s place of business and back home, that is business-use.
If you drive throughout the day from customer to customer, that is business-use.
If you pick up a coffee on your way to the office, that’s personal.
Things get a bit tricky when you have multiple places of regular employment or long-term job sites.
This is really rare, and I’ve only seen it maybe half a dozen times, but if you require medical treatments that are not available in your vicinity and you need to travel more than 40km’s to a hospital or a specialist, and there is no reasonable public transit option, then you can claim vehicle expenses as medical expenses. You’d only be tracking your actual medical-rated mileage here.
The rules here are complicated, so call us if this applies to you.