Let’s Dive Into Automobile and Motor Vehicle Allowances
Hey there! Welcome to the world of automobile and motor vehicle allowances! I’m Rebecca, your go-to guide for all things related to this complex topic. If you’ve got tax questions related to cars, trust me, you’re in the right place! Let’s kick off this journey together, shall we?
You might be wondering, what’s the deal with automobile allowances anyway? Well, if you’re running a business and need your employees to take their own vehicles out on the job, then you need to understand how to handle those allowances—not to mention how to report them properly. Trust me, getting this right can save you and your employees a ton of hassle come tax time.
Today, we’ll cover a range of topics to help clarify things for you:
- What exactly an automobile allowance is
- How to figure out a reasonable per-kilometre allowance
- The importance of Form T2200
- What your employees can deduct
- How to report these allowances
- Excluding advances from employee income
- The nitty-gritty details required for logbooks
Understanding Automobile Allowances
So let’s get into it! What’s an automobile allowance? It’s a financial reimbursement that employers give employees to cover costs associated with using their vehicles for work. But hang on! All automobiles are motor vehicles, but not all motor vehicles qualify as automobiles. Confused? Don’t be! Think of an automobile as something that typically carries up to nine folks—yup, that includes the driver.
One day, my buddy John, who runs a consulting firm, asked me if paying his employees by the mile was legal. When I explained it to him, it was like a lightbulb went off! He realized he could compensate them fairly and keep it all above board. It was a win-win situation!
While we’re at it, let’s clear up “motor vehicle.” This term refers to any self-propelled device that can roam the streets. Think cars, trucks, and—well, let’s skip the trolley buses and rail vehicles. Those don’t count. They are tied to specific tracks, and that’s just not what we’re talking about here!
The Fun of Reasonable vs. Unreasonable Rates
Now that we know what allowances are, let’s chat about rates. What’s reasonable, and what’s unreasonable? This distinction is crucial. If the rate is viewed as unreasonable, it can lead to tax implications that could rain on everyone’s parade. The CRA (Canada Revenue Agency) has laid down some guidelines for us to follow. Lucky for us, they’ve provided prescribed rates under section 7306 of the Income Tax Regulations. These rates help employers offer allowances that won’t give the taxman a reason to raise an eyebrow.
Your go-to rate for 2021 is 59 cents per kilometre for the first 5,000 km driven. If you rack up more than that, it drops to 53 cents per km. Heads up for folks in the Northwest Territories, Yukon, and Nunavut—you get an extra boost of 4 cents for those crazy remote roads!
But here’s the kicker: if an employer gives an allowance that just seems to stray too far from these prescribed rates, then it gets classified as unreasonable. For example, if Bob offers his sales team a flat rate that doesn’t tie back to the miles driven, guess what? That’s taxable income and must be reported.
The Impact of Form T2200
Okay, let’s switch gears to Form T2200 for a minute. You might be thinking, “What in the world is that?” Well, my friend, it’s a game-changer! This form allows your employees to claim specific employment expenses when they file their taxes. It’s like having a golden ticket to get some money back!
Picture this: your employee drives all over town for work, racking up the mileage. To claim those expenses at tax time, they’ll need that completed and signed T2200 form in hand. This form is divided into three parts. Part A is for employee info, Part B is all about conditions of employment, and Part C is your stamp of approval as the employer. Keep this in mind: they need to keep that signed copy plainly visible for when the CRA decides to play “tax officer.”
Years ago, I worked with a nonprofit that had to fill out T2200 forms for several volunteers who used their cars while serving the community. It was a little extra work, but knowing they could get some cash back made it worth it in the long run!
What Your Employees Can Deduct
Let’s run through what expenses your employees can actually deduct when it comes to their vehicles. Employees can deduct expenses like fuel, maintenance, repairs, insurance, registration fees, and even loan interest if they financed their ride. Sounds good, right?
I once had a co-worker who was super diligent about keeping his expense reports. He would save receipts like a squirrel hoarding nuts! While many folks just toss their receipts in a drawer, he swore by the system. Every year, he’d snag a solid refund on his taxes just because he kept everything organized. It was definitely a game changer for him!
The deductions don’t stop there. Your employees can also claim capital cost allowance, which is a fancy way of saying they can write off some of the costs of depreciation for their vehicle over time. Plus, if they leased their vehicle instead, they can also deduct those costs, which is another awesome way to ease financial stress.
Report, Report, Report!
Now that we’ve covered what your employees can deduct, let’s talk about reporting those allowances. This part is super crucial and needs to be in the forefront of your mind. You’ve got to report taxable automobile allowances on your employees’ T4 slips. In box 14 for “Employment Income,” include the total yearly allowance. Then, in “Other Information,” you’ll want to enter the amount using Code 40. Easy peasy!
Once, our HR department had a mix-up when it came to reporting allowances. Some allowances slipped through the cracks, and when the CRA came knocking, we had to fix it fast. From that moment on, we triple-checked everything before finalizing those T4s. Lesson learned, am I right?
Also, if you’re a third-party payer providing taxable allowances to employees from another employer, you must report those benefits on the “Other Information” part of the T4A slip. It’s non-negotiable. So, stay on top of it!
Mid-Article FAQ
What is an automobile allowance?
An automobile allowance is a reimbursement given by employers to employees for vehicle expenses incurred while performing work duties. It helps cover the costs associated with using personal vehicles for business trips.
How do I know if my allowance rate is reasonable?
The CRA sets prescribed rates, so if your rate aligns with them, it’s likely reasonable. For 2021, it’s 59 cents per km for the first 5,000 km and 53 cents for any distance beyond that.
What happens if I use an unreasonable rate?
If your allowance is deemed unreasonable, it becomes taxable income. You’d need to report it, and the corresponding deductions for CPP and EI must be taken from it too.
Can employees claim other vehicle-related expenses?
Absolutely! Employees can claim a variety of expenses, such as fuel, insurance, repairs, and depreciation, as long as they’re connected to business use.
What’s the deal with Form T2200?
This form is a declaration of employment conditions that employees must keep to claim allowable vehicle expenses. It essentially helps them legitimize their expense claims during tax time.
Keeping a Logbook
Okay, so we’ve talked about a lot, but here’s where it gets really practical. Keeping a logbook is essential for anyone claiming vehicle expenses. Whether you do it through a shiny app or classic pen-and-paper, the logbook supports your claims. I can’t stress this enough!
I remember when I first started tracking my mileage. It seemed like a tedious task, but it turned out to be so helpful. Logging every trip meant I could back up my claims with solid evidence. I often found that the trips I thought were minimal added up way more than I expected!
Your logbook should include detailed receipts, a record of total kilometres driven for the year, and logs for each work trip—don’t forget the date, destination, and purpose of the trip! Without this information, you’ll be running into red tape and possibly losing deductions.
COVID-19 Measures & Beyond
We can’t ignore the COVID-19 impact, right? Yeah, the CRA has rolled out some temporary measures for 2020 and 2021 to ease things up a bit. If an employee used their vehicle more than 50% of the time for business in 2019, they may still be able to claim that they did in 2020 and 2021. It’s a little glimmer of hope in these crazy times.
I heard from a friend who runs a small business, and he told me that having these accommodations made things a tad easier for him during the pandemic. He felt less stressed about tax implications, knowing he could still make the same claims despite not using their vehicles as much.
Just a heads up: only employees using the same vehicle and employer as in 2019 are eligible for these options, so make sure you’re keeping track of that too!
Wrapping It Up!
Wow, what a rollercoaster ride through the quirks of automobile allowances! We’ve covered everything from the definitions to reasonable rates, reporting obligations and even tips for keeping adequate records. It’s a lot to take in, but I hope you feel a bit more informed and ready to tackle the next tax season.
Remember, tax stuff can seem as complicated as calculus, but it doesn’t have to be! If things still seem fuzzy or if you find yourself needing more specific guidance, hit up the CRA website. They’ve got tons of resources and you can get help through their liaison officers. Get on it!
Thanks for hanging out with me today. I hope you gleaned some useful insights! Until next time, take care and be ready for more webinars coming your way. Peace out!
