Understanding Automobile and Motor Vehicle Allowances
Hey there! Welcome to the world of automobile and motor vehicle allowances. I’m excited to dive into this subject with you. Now, whether you’re an employer dishing out allowances or an employee using your own ride for work, there’s a lot to unpack here. We’re going to explore what these allowances are all about, how they impact both your income and employer responsibilities, and all those pesky forms like T2200. Spoiler alert: it’s not as daunting as it sounds!
Just picture this. You’ve taken your car to do some work-related tasks – meetings, site visits, or maybe just running around town trying to get things done. Now, wouldn’t it be great if you could get reimbursed for that? That’s where automobile allowances come into play. By the end of this article, you’ll be a pro at this topic!
What Are Automobile Allowances?
So, let’s get into it. An automobile allowance is pretty much what it sounds like—money given to you by your employer to help cover the costs of using your vehicle for work. But there’s a twist! Not all money given out as allowances is created equal. Some may be taxable, while others can be totally tax-free. This is key for an employee to understand.
For instance, I remember a friend of mine who worked as a sales rep and drove all over town for client meetings. Her employer provided her with a standard allowance based on distance traveled. She didn’t have to claim that on her taxes, which was a huge win!
Now, what’s the difference between reimbursement and allowance? A reimbursement is money you get back for actual expenses incurred. Think fuel for that drive or a toll for the highway. An allowance, on the other hand, is a pre-set amount paid regardless of actual expenses. Clear as mud? Hopefully, not too muddy!
Defining Reasonable Rates
Now onto the nitty-gritty—what does it mean for a rate to be “reasonable”? The CRA has some guidelines on this. Basically, they’ve set a standard that helps employers know how much they should be paying. It’s like their best guess on what a reasonable per-kilometre amount is.
For example, the CRA’s guidelines currently say around 59 cents per kilometre for the first 5,000 kilometers driven. After that, it drops to about 53 cents. Crazy, right? Plus, in certain remote areas like Northwest Territories, you can snag an extra 4 cents. But remember, if an employer goes over those limits, things can get a bit sticky!
I have a buddy who went all out on his allowances during tax season, thinking he could just give himself a killer rate. Spoiler alert: it backfired big time when he had to explain to the CRA why he thought $1 per kilometer was reasonable. Lesson learned!
Tax Implications of Allowances
Let’s talk taxes because, honestly, who doesn’t love a good tax chat, right? Here’s the deal: if the allowance you receive is considered reasonable, then you typically don’t have to report it as taxable income. Yup, really! That means no CPP deductions, no EI premiums, and certainly no income tax on that cash.
On the flip side though, if your employer dabbles in unreasonable rates—like a flat rate that doesn’t consider mileage—they’ll have to report it as income. This is when the pesky T4s come into play, and you’d better believe the CRA is watching closely. One year, I thought I was slick getting a flat rate allowance for my car. Turns out I had to count that as income because it wasn’t tied to how far I drove!
FAQs about Automobile Allowances
What happens if my allowance is unreasonable?
If the amount your employer provides diverges significantly from the CRA’s prescribed rates, it becomes taxable. Make sure you keep good track of your expenses to avoid surprises come tax season.
Do I need to fill out Form T2200?
Yes! If you wish to claim your employment expenses, your employer has to fill out and sign Form T2200 for you. It’s a crucial step in making sure you can deduct the right amounts.
What can I deduct as employment expenses?
You can claim a variety of expenses including fuel, maintenance, insurance, and even license fees. Make sure to keep all those receipts handy!
Why is keeping a logbook important?
Ahh, the logbook—your trusty companion for tracking your business mileage. It’s essential for proving that your vehicle use relates to your job, which means you can deduct those expenses come tax time.
Accountable Advances vs. Reimbursements
Let’s not forget about accountable advances, which are pretty much pre-paying you for expenses you’re expected to incur. You’re given an amount upfront, and any unspent money? You gotta return that back to your employer. Keeping records is a MUST!
This reminds me of a time when my coworker took an advanced payment for a business trip. She went overboard and got a fancy hotel, but later found out she had to return the excess amount. It’s all fun and games until you realize how tricky finances can be!
On the other hand, reimbursements are laid-back. Keep those receipts and receipts only from business-related expenses. You can submit them to your employer, and they’ll pay you back. Easy peasy, right? Just keep in mind: personal expenses don’t get any love here. If you mix personal and business travel, the personal bit is definitely taxable.
How to Report Allowances
If you do get a taxable automobile allowance, you’ve gotta report it properly. Employers must include the total allowance on the T4 slip under ‘Employment Income’ and specify the amount in the ‘Other Information’ section. This is where that Code 40 comes into the mix.
I once tried to skip over this and got slapped with a lovely little reminder from the CRA. Nothing like an unexpected email to ruin your day! So, trust me, it’s always better to dot your i’s and cross your t’s when it comes to tax time.
Employers should also know that if another entity pays allowances on behalf of the employer, those amounts must be included in the “Other Information” section of a T4A slip. Make sure everyone’s on the same sheet of music!
Keeping Records: The Unsung Hero
Let’s be real—keeping a logbook might feel tedious, but it’s so worth it. Whether you’re using an app or going old school with pen and paper, having detailed records is what’ll save you when the CRA comes knocking.
What should that logbook look like? You’ll want to track total kilometers at a minimum, along with a note of each business trip, date, destination, and purpose. It’s not as boring as it sounds, I promise! I used to jot these down during lunch breaks, and honestly, it became kind of fun to look back and see the different places I visited for work.
So, keep those receipts and remember: the details count! A well-kept record can make claiming expenses a breeze!
Covid-19 Considerations
Quick shoutout to Covid-19! Yep, the pandemic has changed how we handle many things, and tax filings are no exception. Though the CRA has created special measures for the tax years through 2021, they haven’t modified how we handle automobile allowances per se.
However, if you used your automobile for business more than 50% of the time pre-pandemic, you might still qualify for special treatment. This means you could keep benefiting from the reduced standby charge rate. Just make sure your employer is on board with this if you’re still driving for work!
This topic is even more relevant now, considering how many of us turned to remote work and Zoom meetings. It’s interesting to think about how our spending patterns have changed with so much less travel for work!
Final Thoughts
That’s a wrap, folks! We’ve gone through everything from the definition of automobile allowances to how to report and track those expenses. If you’re an employer or an employee, understanding these allowances can save you time – and money!
Keep those tips in mind, and remember, tax stuff can be tricky. If something doesn’t make sense, don’t hesitate to reach out. The CRA even provides resources for those who want some extra help. Knowledge is power, right?
Thanks for tuning in! I hope this has made the world of automobile allowances a little less daunting. Keep cruising, and chat soon!
