Deducting Vehicle Expenses? Don’t let CRA take YOU for a ride…
The Canada Revenue Agency (CRA) may finally be done with their professional fees audit project, but they are now on to a new one. This one is going to be much more onerous for many business owners. CRA’s new project is the audit of vehicle expenses. The details being requested are quite extensive. The standard audit request letter is asking for:
- A detailed list of general ledger transactions for all vehicle expense categories
- A copy of the invoices or receipts to support the ten largest items for each tax year under review.
- A copy of the invoices and receipts to support all ledger items included in vehicle expenses from a particular month in each tax year under review
- A listing of all the vehicles related to the expenses claimed along with details on the make, model and who owns or leases the vehicles (the company, a shareholder, or an employee)
- The percentage allocation between personal use and business use with the supporting mileage log
- An explanation of the accounting treatment and whether the personal use portion was reimbursed by the employee or an employee benefit and/or standby charge was reported on the employees annual T4 slip
What you need to know
The company needs to keep a mileage log for each vehicle that it is claiming vehicle expenses for, whether or not the vehicle is company-owned, leased or personally owned and with a mileage allowance being deducted. The CRA explicitly requires you to maintain a log (in paper or electronic format) in which your kilometers driven for business purposes are documented in detail, including the date, the business destination, the purpose of the trip, and the mileage before and after the travel. Fortunately, there are several mileage tracking applications available for Apple and Android devices which use the phone’s GPS data to document some of this information for you. In the absence of a formal detailed log, any vehicle expenses claimed as a deduction could be automatically denied.
If there are company-owned or leased vehicles that are used for business, a taxable benefit must be calculated for each employee or shareholder and reported on their annual T4 slip based on the cost of the vehicle (standby charge) and the personal kilometers driven during the year (operating benefit). A taxable benefit must also be reported on their T4 slip if they were paid an “unreasonable” mileage allowance.
Typically, CRA will not accept credit card statements as support for expenses paid as they do not provide sufficient details. You need to keep the actual invoices or receipts for all vehicle expenses.
We can help
The level of detail requested by CRA to substantiate your vehicle expense is significant and to respond to this type of review, is a very time consuming and costly exercise. Our first such audit request resulted in more than $3,000 of our time to prepare the response. If you haven’t already, we suggest that you consider purchasing our Audit Shield coverage to insure you against unexpected professional fees like responding to a CRA audit request on vehicle expenses. For more information, click on Services/Tax Services and scroll down to the section on Audit Shield.
The best way to handle such CRA audit requests is to ensure that you keep sufficient records to justify your business vehicle expenses and to understand the general rules for vehicles and related expenses. Connect with Lott & Co… we can help clarify these rules.