As noted in a previous issue of SPARK, CRA regularly conducts limited “desk audits” to review specific expenses claimed on corporate income tax returns. Recently, it appears CRA has a new area of interest – the deduction of vehicle expenses claimed by a corporation.

This article will discuss the most common types of corporate vehicle expenses and the information requested by CRA to support these deductions. It will also emphasize the importance of sufficient and appropriate record keeping in order to reduce the potential for undesirable reassessments.

Deductible vehicle expenses

There are various types of expenditures related to automobiles that can be claimed by a corporation. Some of these include:

• Fuel
• Maintenance and repairs
• Insurance
• License and registration fees
• Capital cost allowance
• Eligible interest for a vehicle loan
• Eligible leasing costs.

In addition, the circumstances in which a company may incur deductible vehicle expenses may also vary.

For example, expenses may be incurred for company-owned or leased vehicles, which are used by employees in the course of carrying out their respective duties. These employees may also be permitted to use the company vehicle for personal-use purposes. In this circumstance, the calculation of a taxable benefit to be included in their income or a reimbursement by the employees may be required.

Alternatively, employees may be required to use their own vehicle to carry out their respective duties. Accordingly, these individuals may be reimbursed by the company for a proportion of actual expenses incurred or paid an "allowance" as compensation for the business-use of their personal vehicle.

CRA review letter information request

As the nature of vehicle expense deductions will vary depending on the specific circumstances, the standard CRA review letter may appear to be much more daunting than that for other expense line items.

A standard CRA vehicle expense review letter will usually request a broad list of information, including:

• A detailed list of transactions included in vehicle expenses (i.e.: general ledger account detail);
• Copies of invoices to support the 10 largest transactions for the tax years under review;
• Copies of invoices to support all transactions from a specified month of the tax years under review; and
• A list of the vehicle(s) related to the expenses, including the make and model and whether owned or leased by the company, an employee or a shareholder.

If vehicles were used for both business and personal purposes, the following information will also be required:

• The percentage of business and personal-use of the vehicle(s), supported by a copy of the mileage log used to track this usage; and
• Details of accounting for the business and personal-use of the vehicles including any expense reimbursements, vehicle allowances, or taxable benefits.

Common record keeping deficiencies

The following are common record keeping deficiencies that pose challenges when supporting vehicle expense claims:

• Lack of/inadequate mileage log: Whether a per kilometer allowance is paid or expenses allocated between the business and personal-use of a vehicle, a mileage log is critical to supporting these deductions. Without a sufficiently detailed mileage log, CRA will often automatically deny these claims pre-emptively.

For more information on the specific detail requirements of a mileage log, please visit CRA’s website.

• Insufficient / inappropriate support for itemized expenses: Even if a sufficient mileage log is produced, original receipts for vehicle expenses such as fuel or maintenance are frequently not retained. CRA will generally not accept credit card statements as support for expenses as they are not considered to provide sufficient detail. Accordingly, these expenses may be denied if the original receipts are not available.

Note that where employees use personally owned or leased vehicles for business related travel, it may be preferable to pay a “reasonable” allowance rather than reimburse specific expenses to simplify recordkeeping.

In this circumstance, where a "reasonable" per kilometer allowance is paid, and provided it is supported by a sufficient mileage log (or expense reports), the corporation is not required to obtain receipts or invoices to support the reimbursement. Furthermore, this allowance may not have to be included in the taxable income of the recipient.

CRA provides the per kilometer prescribed rates to support a "reasonable" allowance annually. For 2019, the payment of $0.58 for the first 5,000 kilometers and $0.52 for each kilometer thereafter will qualify as a “reasonable” allowance.

Implications of insufficient record keeping

Should your company be selected for a vehicle expense review, insufficient record keeping may result in reassessments of the selected taxation years and consequently additional taxes and arrears interest. In addition, the potential for further CRA audit activity of your corporation may increase.

Individual employees may also be impacted if CRA determines that an additional taxable benefit should have been included in their employment income.

Don’t let CRA put the brakes on your vehicle expense claims! If you receive a CRA vehicle expense review letter, please contact your SPLLP tax advisor for guidance on the supporting documentation requirements and assistance with your response.