Claim­ing auto ex­penses can be sticky is­sue that’s open to in­ter­pre­ta­tion

Saskatoon StarPhoenix - - FINANCIAL POST - JAmie Golombek

Au­to­mo­bile ex­penses con­tinue to be an area of scru­tiny for the tax man, so you shouldn’t be sur­prised if the Canada Rev­enue Agency starts ask­ing you ques­tions about how you may have claimed any ve­hi­cle ex­penses or em­ployer’s travel al­lowances on your tax re­turn. In­deed, two re­cent tax cases de­cided over the sum­mer dealt with em­ploy­ees and their cars.

GEN­ERAL RULE

As a gen­eral rule, if you’re an em­ployee who needs to use your car for work, you may be able to deduct some of your au­to­mo­bile ex­penses on your tax re­turn, but you must meet cer­tain con­di­tions.

First, you must nor­mally be re­quired to work away from your em­ployer’s place of business or in dif­fer­ent places. Sec­ond, un­der your con­tract of em­ploy­ment, you must be re­quired to pay your own au­to­mo­bile ex­penses and this must be cer­ti­fied by your em­ployer on a signed copy of CRA Form T2200, Dec­la­ra­tion of Con­di­tions of Em­ploy­ment.

Fi­nally, to claim ve­hi­cle ex­penses, you must not be the re­cip­i­ent of a “non-tax­able” al­lowance for mo­tor ve­hi­cle ex­penses. An al­lowance is con­sid­ered to be non-tax­able when it is based solely on a “rea­son­able” per-kilo­me­tre rate. For 2018, the CRA con­sid­ers a rea­son­able rate to be 55 cents per kilo­me­tre for the first 5,000 kilo­me­tres driven and 49 cents/ km af­ter that. In the ter­ri­to­ries, the rate is 4 cents/km higher.

If your em­ployer does re­im­burse you but you feel that the amount you are re­im­bursed was not rea­son­able to cover your ac­tual oper­at­ing costs of your ve­hi­cle, you can deduct the “work” por­tion of your ac­tual ve­hi­cle oper­at­ing ex­penses pro­vided any em­ployer ve­hi­cle al­lowance paid to you is in­cluded in your in­come. Since most em­ploy­ees use the same ve­hi­cle for both em­ploy­ment and per­sonal use, to sup­port the amount you can deduct you should keep a record of the to­tal kilo­me­tres you drove dur­ing the year and the kilo­me­tres you drove to earn em­ploy­ment in­come.

In each of the two cases de­cided this sum­mer, the court ex­am­ined whether an al­lowance paid by an em­ployer was rea­son­able.

CON­STRUC­TION WORKER

The first case in­volved a Toronto con­struc­tion worker em­ployed by a con­struc­tion com­pany who was ex­pected to trans­port him­self to var­i­ous work sites daily. Ac­cord­ing to daily en­tries in his three yearly logs, the tax­payer’s daily travel by car dur­ing this three year pe­riod in­cluded fre­quent travel to Hamil­ton and re­turn (logged as 167 km daily), to Aurora and re­turn (logged as 92 km daily) and in­fre­quently to Whitby and re­turn (logged as 94 km daily).

The tax­payer was re­assessed by the CRA for his 2010, 2011 and 2012 tax­a­tion years dur­ing which years he sought to deduct mo­tor ve­hi­cle ex­penses to­talling $11,000 in 2010, nearly $12,500 for 2011 and ap­prox­i­mately $12,000 in 2012.

The tax­payer’s em­ployer signed the req­ui­site Form T2200s for each of the three years in is­sue and on each one re­ported that a “fixed” mo­tor ve­hi­cle al­lowance, “an­no­tated by the em­ployer as be­ing ‘non-tax­able,’” had been paid to the tax­payer in each of 2010 ($1,385), 2011 ($3,550) and 2012 ($3,810).

These amounts were cal­cu­lated based on the des­ti­na­tions trav­elled rather than di­rectly on the ba­sis of kilo­me­tres driven.

The judge con­cluded that since the al­lowance “was a so-called ‘fixed’ al­lowance,” it was not con­sid­ered rea­son­able as it was not de­ter­mined “solely (on the) num­ber of kilo­me­tres for which the ve­hi­cle is used (for) ... em­ploy­ment.”

Based on this, one would have thought the re­sult would be that the tax­payer had to in­clude the fixed al­lowance in in­come and could pro­ceed to deduct his ve­hi­cle ex­penses. But, oddly, the judge de­nied the tax­payer’s ve­hi­cle ex­pense de­duc­tion, ei­ther be­cause the judge sim­ply made a mis­take in­ter­pret­ing the law or per­haps the judge con­cluded that since the tax­payer didn’t in­clude the al­lowance in his in­come, the tax­payer couldn’t avail him­self of the de­duc­tion.

SNOW RE­MOVAL SER­VICES

The sec­ond case in­volved a tax­payer who worked for a snow re­moval com­pany that has a num­ber of snow and ice clear­ing con­tracts with var­i­ous in­sti­tu­tions in Bar­rie, Ont., such as the town hall, the po­lice and fire de­part­ments, schools, churches, and other mu­nic­i­pal and com­mer­cial lo­ca­tions.

The con­tracts in­clude clauses com­mit­ting the com­pany to per­form daily and nightly “snow runs” to mon­i­tor where within the area snow and/ or ice clear­ing is re­quired. The dis­tance of the snow run fixed route was about 92 kilo­me­tres.

Snow runs were done as needed, some­times one, two or three times a night and also as deemed needed dur­ing day­time hours.

No records were kept ei­ther by the em­ployer or any­one else of the num­ber of snow runs done dur­ing any par­tic­u­lar 24-hour pe­riod.

The snow runs were done by the tax­payer us­ing his per­sonal ve­hi­cle for which he was paid a fixed al­lowance of $9,100 an­nu­ally in 2012 and 2013, paid in in­stal­ments of $350 ev­ery two weeks of the year, rather than only be­ing paid dur­ing the win­ter sea­son “for cash flow pur­poses of the Em­ployer.”

Ap­par­ently, the $9,100 fig­ure was picked by the em­ployer’s ac­coun­tant, who had rec­om­mended it “based on some av­er­ag­ing cal­cu­la­tions as to (the) likely num­ber of snow runs driven in any given year.”

The tax­payer did not re­port the $9,100 an­nual al­lowances on his tax re­turns “think­ing it was wholly de­ductible any­way.” The CRA dis­agreed and re­assessed on the ba­sis that these pay­ments were not “rea­son­able” ve­hi­cle al­lowances as they were not based on the num­ber of kilo­me­tres driven and there­fore had to be in­cluded in his in­come.

The tax­payer ar­gued the pay­ment should be con­sid­ered “rea­son­able” as he knew the spe­cific dis­tance of each snow run (92 km) and the to­tal pay­ment was based on an av­er­age of the num­ber of snow runs driven.

Thus, the is­sue in the case came down to whether the an­nual $9,100 pay­ment was a “rea­son­able” ve­hi­cle al­lowance and thus could be ex­cluded from the tax­payer’s in­come?

The judge found that the ve­hi­cle al­lowance paid by the em­ployer to the tax­payer does not qual­ify as be­ing “rea­son­able” and hence ex­empt from in­come in­clu­sion be­cause the amounts paid were not de­ter­mined based solely on kilo­me­tres ac­tu­ally driven.

As prior ju­rispru­dence con­cluded, “an es­ti­mate was not good enough to con­sti­tute a rea­son­able ve­hi­cle al­lowance. The amount of the al­lowance had to be based on, “ac­tual kilo­me­tres trav­elled rather than an ap­prox­i­ma­tion.”

Jamie.Golombek@cibc.com Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Manag­ing Di­rec­tor, Tax & Es­tate Plan­ning with CIBC Fi­nan­cial Plan­ning & Ad­vice Group in Toronto.

NUM­BER OF KILO­ME­TRES AT 55-CENTS PER RATE 5,000

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