Many people today not only use their car for personal use but also for business purposes. As such, they are entitled to get a deduction for the business portion of the car expenses. This is normally accomplished by a prorating of yearly expenses based on distance traveled for business. A taxpayer who has made a claim for motor vehicle expenses on their tax return knows that they are required to maintain records to support the claim. The best evidence to support the claim is the use of a logbook to log business travel for the entire year. The logbook will show, the destination, the reason for the trip and the distance covered. for each business trip. However this can be an enormous challenge for the taxpayer to maintain this logbook for the entire year.
A new simplified logbook
On June 28, 2010, the Minister of National Revenue announced the introduction of a new simplified logbook for motor vehicle expenses as part of the government’s overall strategy to assist small and medium sized businesses and Canada Revenue Agency’s (CRA’s) aim to ease the tax compliance burden of small business owners. After one complete year of keeping a logbook (starting in 2009 or thereafter) to establish a base year, a three month sample logbook may be used to extrapolate business use for the entire year, provided the usage calculated is within 10% of the base year.
CRA has indicated that they would be prepared to accept a logbook maintained for a sample period as evidence of a full year’s usage if a taxpayer meets the following criteria:
- The taxpayer has previously filled out and retained a logbook covering a full 12-month period that was typical for the business (the “base year”). The 12-month period is not required to be a calendar year.
- A logbook for a sample period of at least one continuous three-month period in each subsequent year has been maintained (the “sample year period”).
- The distances traveled and the business use of the vehicle during the three-month sample period is within 10 percentage points of the corresponding figures for the same three-month period in the base year (the “base year period”).
- The calculated annual business use of the vehicle in a subsequent year does not go up or down by more than 10 percentage points in comparison to the base year.
If these conditions are not met (for example, if the business use increase is more than 10% in a three month period), the taxpayer would be required to calculate the business use based on the actual mileage of the vehicle.
In their news release, CRA provided the following example:
An individual has completed a logbook for a full 12-month period, which showed a business use percentage in each quarter of 52/46/39/67 and an annual business use of the vehicle of 49% (this percentage is based on annual distance, and not the average of the percentages for the four quarters). In a subsequent year, a logbook was maintained for a three-month sample period during April, May and June, which showed the business use as 51%. In the base year, the percentage of business use of the vehicle for the months April, May and June was 46%.
The business use of the vehicle would be calculated as follows:
(51% ÷ 46%) × 49% = 54%
Breaking down the math
Because the business use of the vehicle increased in the subsequent period as compared to the base period (from 46% to 51%) this formula adjusts the business use of the vehicle for the whole year (from 49% in the base year to 54% for the subsequent year).
In this case, in the absence of contradictory evidence, the CRA would accept the calculated annual business use of the vehicle for the subsequent year as 54%. (I.e., the calculated annual business use is within 10% of the annual business use in the base year – it is not lower than 39% or higher than 59%.)
In a year in which a vehicle is purchased, care must be taken to document the use as it could have implications on the percentage of business use.
MNP is one of the largest chartered accountancy and consulting firms in Canada, providing client-focused assurance, taxation and business advice. National in scope and local in focus, MNP has proudly served individuals, public and private companies for more than 65 years. Through the development of strong relationships, MNP provides organizations with personalized strategies and a local perspective to help clients succeed. For more information, visit www.mnp.ca and www.mnpcorporatefinance.ca