Top five common Corporate Income Tax issues faced by clients: Auto Expenses Not Recorded Properly

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Grant  GilmourFacts:

Automobile expenses such as gas, insurance and repairs and maintenance are common expenditures that a  corporation incurs in the course of business. It is also a common audit item as CRA are aware that many corporations do not record such expenses correctly.

Discussion:

The biggest issue with vehicle expenses is that often the personal usage of a vehicle is not properly accounted for. With vehicles owned by the corporation it is correct to record all the related expenses in the company accounts, but a taxable benefit needs to be determined based on the personal usage of that vehicle. This benefit is then added to the user’s T4.

Conversely with a personally owned vehicle,  we often see all the expenses paid by the corporation and treated as a corporate expense. Technically this is incorrect as you are using corporate cash to pay for a personal asset. This is a big concern of CRA. The usual correct treatment is to record these transactions as a shareholder loan account draw and replace the expense with an allowance based on a per km usage. Think of it as a reimbursement.

In either situation, we have some suggestions to help manage the expenses and ensure you treat them correctly:

• Keep a vehicle log showing each travel day and the people visited, the purpose of the trip and how many km were driven. CRA have recognized this is a time consuming exercise and so allow you to extrapolate a full year of travel based on a 3 month sample.

• Identify the costs associated with each vehicle and record them in separate accounts. This is especially important if you are running more than one vehicle as you can then accurately calculate the benefits or allowance on the correct vehicle.

• Take the odometer reading at the beginning and end of the year so you know the total km travelled during the year.

•If you are going on vacation for a long period of time, and have a corporately owned vehicle, leave the keys and vehicle at the business premise, if practical. This is because you are only subject to a taxable benefit on vehicles you have access to. Giving up the keys shows that you do not have access to the vehicle even if you are in a different country.

• Manage your daily driving to maximize your business km. Going direct from home to work is viewed as personal travel. Going from home to a client and then to work can be viewed as business travel. Inserting business related activities on your commute seamlessly turns the travel from personal to business.

Recommendation:

If you are concerned about vehicle expenses then contact Gilmour Knotts Chartered Accountants for assistance.

OUR FAQ ISSUE NEXT WEEK

What are the most common corporate income tax issues our clients face? Next week part five of our six part series will focus on management fees not recorded properly.