Maintaining a Vehicle Log

As a self-employed individual, you are able to claim an income tax deduction for certain automobile expenses you incur to earn income from your business; however, adequate records must be available to support deductions claimed.

If you only use your vehicle occasionally for business purposes, you can claim motor vehicle expenses on a per-trip basis.

If you regularly use your vehicle for business and personal trips, you can claim part of the total operating expenses for your vehicle as a business expense. Only those expenses relating to the business travel or commercial activity are considered eligible for a business deduction and for input tax credits on GST/HST. Vehicle expenses are apportioned between deductible business expenses and non-deductible personal expenses based on the ratio of business versus personal kilometers driven. To support a deduction or claim, you must keep accurate records that show the part of the total kilometers that you drove for your business.

Full logbook

The best evidence to support the use of a vehicle is an accurate logbook of business travel maintained for the entire year, showing for each business trip, the destination, the reason for the trip and the distance covered. You can deduct motor vehicle expenses only when they are reasonable and you have receipts to support them. To get the full benefit of your claim for each vehicle, keep a record of the total kilometers you drive and the kilometers you drive to earn business income. For each business trip, keep a log listing the following: date, destination, purpose, and number of kilometers driven. Record the odometer reading of each vehicle at the start and end of the fiscal period. 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.

Consider using a free App to assist in preparing your vehicle log (see, for example, MileIQ).

Simplified logbook

You can choose to maintain a full logbook for one complete year to establish a base year’s business use of a vehicle. After one complete year of keeping a logbook to establish the base year, you can use a three-month sample logbook to foresee business use for the entire year, as long as the usage is within the same range (within 10%) of the results of the base year. Using this method, the business use of the vehicle in the following year will be calculated by multiplying the business use as determined in the base year by the ratio of the sample period and base year period. The formula for this calculation is as follows: (Sample year period % ÷ Base year period %) × Base year annual % = Calculated annual business use.

Where the calculated annual business use in a later year goes up or down by more than 10%, the CRA does not consider the base year to be an appropriate indicator of annual usage in that later year. In such a case, the sample period logbook would only be considered reliable for the three-month period it had been maintained. For the remainder of the year, the business use of the vehicle would need to be determined based on an actual record of travel or alternative records, as discussed above. In these circumstances, you should generally establish a new base year by maintaining a logbook for a new 12-month period.

Example:

An individual has completed a logbook for a full 12-month period, which showed a business use percentage in each quarter of 52/46/39/67 and an annual business use of the vehicle as 49%. In a subsequent year, a logbook was maintained for a three-month sample period during April, May and June, which showed the business use as 51%. In the base year, the percentage of business use of the vehicle for the months April, May and June was 46%. The business use of the vehicle would be calculated as follows: (51% ÷ 46%) × 49% = 54%. In this case, the CRA will accept, in the absence of contradictory evidence, the calculated annual business use of the vehicle for the subsequent year as 54% (i.e. since the calculated annual business use is within 10% of the annual business use in the base year; specifically, it is not lower than 39% (49%—10%) or higher than 59% (49% + 10%)).

As a general rule, records and supporting documents are only required to be kept for a period of six years from the end of the tax year to which they relate. However, the logbook for the full 12-month period must be kept for a period of six years from the end of the tax year for which it is last used to establish business use.

More than One Vehicle

If you use more than one motor vehicle for your business, keep a separate record for each vehicle that shows the total and business kilometers you drive, and the cost to run and maintain each vehicle. Calculate each vehicle’s expenses separately.

Type of Vehicle

The kind of vehicle you own can affect the expenses you can deduct. For income tax purposes, available deductions vary depending on whether you drive a “motor vehicle”, “zero-emission vehicle”, “passenger vehicle”, or a “zero-emission passenger vehicle” (ZEPV) as defined in the Income Tax Act. If the available tax deductions may influence your vehicle choice, we can discuss further the rules related to each type of vehicle. If you own a passenger vehicle or a ZEPV, or you lease a passenger vehicle or a vehicle that would otherwise qualify as a ZEPV, there may be a limit on the amounts you can deduct for CCA, interest, and leasing costs.

Year of Acquisition

Note that the business use of a vehicle in the year it is bought or leased can have implications as to how the vehicle is defined under the Act and on limitations on amounts that can be claimed for certain expenses. You should therefore take extra care to document the vehicle’s use for the entire year when a new vehicle is purchased. We can provide further details regarding these rules as requested.

Example

Jack’s business has a December 31 year-end. He owns a truck that is not a “passenger vehicle” as defined in the Act. He uses the truck to pick up supplies and equipment. Jack kept the following records for his 2019 fiscal period:

• Business kilometers—27,000 km;

• Total kilometers—30,000 km;

• Gasoline and oil—$ 3,500;

• Repairs and maintenance—$ 500;

• Insurance—$1,000;

• Interest (on loan to buy truck)—$1,900;

• License and registration fees—$100;

• Total expenses for the truck—$7,000.

Jack determines the motor vehicle expenses he can deduct in his 2019 fiscal period as follows: (27,000 (business kilometers))/(30,000 (total kilometers)) × $7,000 = $6,300.

Jack can also claim capital cost allowance (CCA) (i.e. depreciation expense) since he owns the vehicle. Jack purchased the vehicle in 2019. The vehicle is included in CCA Class 10 since it did not cost Jack more than $30,000 before sales taxes. Jack’s capital cost in respect of the vehicle is $31,640 ($28,000 purchase price + $1,400 GST + $2,240 PST). $4,271 of CCA can be claimed in 2019 ($31,640 × 0.5 (so-called CCA half-year rule which applies in the year the property is purchased) × 0.3 (Class 10 CCA rate) × 0.9 (business-use portion).

If the CRA audits Jack’s expense claim, provided he has a vehicle log as explained above and receipts to support all expenditures, the full deduction claim should be allowed. If adequate records were not maintained to support a vehicle expense claim for a taxation year and the CRA has chosen the audit the claim, we can assist you in dealing with the CRA.

Deductible vehicle expenses

The types of expenses you may be able to deduct include: license and registration fees; fuel and oil costs; insurance; interest on money borrowed to buy a motor vehicle (special interest deduction limitation rules apply in certain cases); maintenance and repairs; and leasing costs (a maximum per month deduction limit may apply). The expenses also include all applicable federal and provincial sales taxes (GST, HST, PST and QST) to the extent the taxpayer is not a sales tax registrant and does not claim an input tax credit (input tax refund in Québec) for the taxes paid. You can deduct the full amount of parking fees related to your business activities and supplementary business insurance for your vehicle.

You can deduct motor vehicle expenses only when they are reasonable and you have receipts to support them. As a general rule, always get receipts or other vouchers when you buy something for your business (note that the CRA has stated that they will not accept credit card statements as being adequate receipts on the basis that the statements do not provide sufficient detail). Since vehicle expenses are apportioned between business and personal use, keep all receipts related to vehicle expenses.

CRA Audits

In the case of an audit, as noted above, the best evidence to support the use of a vehicle is an accurate logbook of business travel maintained for the entire year, showing for each business trip, the destination, the reason for the trip and the distance covered. The CRA’s practice is to require a car log, and if you do not have one and you are audited, the CRA may disallow your claim for vehicle expenses.

If you have been selected for an audit and did not maintain a vehicle log, the CRA may accept alternative records to support the deduction you claimed in certain cases. The fact that a viable business exists is usually a strong indicator that a person incurred vehicle expenses, because it is difficult to carry on a business without doing at least some driving. For some individuals, the books and records they already maintain as part of their normal business operations may be indicative of the presence of, and the extent of, business driving. An appointment diary indicating what addresses were visited and why, or a log of service calls might be sufficient. Purchase or sales invoices may indicate that items were picked up or delivered by the taxpayer. Examples of other evidence that the CRA may take into consideration include: whether the person has another vehicle for personal travel, the type of vehicle, the nature of the business and the business travel likely required, who else drives the vehicle (e.g., family), how the vehicle is insured, and indications of other personal travel. CRA auditors will generally consider the usage of a vehicle in the context of the entire operation of a particular business. A proposal to disallow a portion of a claim for vehicle expenses would normally only occur where the claimed travel seems out of proportion in that overall context and is not supported by sufficient evidence (individuals are responsible for providing sufficient evidence to demonstrate the accuracy of their claims for business distances driven throughout the year).

Claims for a very low amount of business use generally do not require extensive records to demonstrate business travel. As the percentage of business use and the related expense claims increase, more documentation is expected to be available.

For more information, please contact info@gytdcpa.com or 1 844-GYTD-CPA

GYTDCPA.com-Maintaining a Vehicle Log

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