Automobile and Motor Vehicle Allowances
1. Automobile and Motor Vehicle Allowances
Hello and welcome to Automobile and Motor Vehicle Allowances. I’m Rebecca, your host for today.
For any other tax related questions, call the business enquiries line. Let’s get started.
Whether you are an employer who provides automobile allowances to employees or asks your employees
to use their own vehicle for employment, this webinar will examine how to treat and report employer provided benefits and employee expenses.
Today, we’ll talk about:
- The definition of automobile allowances
- What is a reasonable per-kilometre allowance?
- Why do you have to complete Form T2200
- Employment expenses your employees can deduct
- How to report these allowances
- Excluding advances from employee income
- What should your logbook contain
4. Automobile Allowances – Definition - Automobile
Let’s look at some definitions. While all automobiles are
motor vehicles, not all motor vehicles are automobiles. So, an automobile normally carries individuals on highways or streets. They have a seating capacity of not more than nine occupants: A driver and eight passengers.
5. Automobile Allowances – Definition – Motor Vehicle
While it may look like defining a motor vehicle using the idea of automotive is circular reasoning, it isn’t: Automotive means
self-propelled and by implication able to go anywhere. So a motor vehicle is any self-propelled thing that can travel in any direction, with the limitation of use on streets or highways. So, this does not include a trolley bus, because it is not self-propelled or any rail-based vehicle because they are restricted in the ability to go places.
6. Automobile Allowances – Definition – Reimbursement
A reimbursement includes any repayment to an employee for amounts spent while on employer business. Employees must possess paperwork to prove the amounts. Usually, a reimbursement or an accountable advance for travel expenses is not income for the employee receiving it unless it represents payment for the employee's personal expenses.
7. Automobile Allowances – Definition – Accountable advances
An advance is an amount given to an employee to cover budgeted or predicted expenses. As with reimbursements, the employee must possess proof of payment. Any unspent amounts must be returned.
8. Automobile Allowances – Reasonable Rates
The treatment of an allowance depends on whether the allowance is reasonable or unreasonable. We’ll look now at what the CRA considers to be a reasonable allowance. Not just any amounts are permitted. They must be reasonable amounts, not unreasonable. So, we’ll look at what is reasonable and how that works. For instance, what is a reasonable rate for per-kilometre allowance? The first thing to know is that the CRA has prescribed rates under section 7306 of the Income Tax Regulations that are considered to be reasonable. This allows employers to use a rule of thumb rather than calculate a reasonable rate for each employee. These account for the type of vehicle and driving conditions. As well, the employee must not have been reimbursed for expenses related to the same use of the vehicle.
9. Automobile Allowances – Reasonable Rates
Reasonable allowance has implications: The amounts paid are not taxable. There is no need to deduct CPP contributions, EI premiums or income tax on the allowances. There is no need to include the amounts on an employees T4 slip. Employees should not include the allowance on their tax and benefit return unless they want to deduct employment expenses.
10 Automobile Allowances – Reasonable Rates
Employers should note that they are responsible to prove that the rates paid are reasonable.
11. Automobile Allowances – Reasonable Rates
For 2021, the prescribed rates are: 59¢ per kilometre for the first 5,000 kilometres driven; 53¢ per kilometre above that and an additional 4¢ permitted in Northwest Territories, Yukon and Nunavut.
12. Scenario – Reasonable Rates
So, let’s say Jonathan owns a consulting firm. He has four employees on the road who use their own vehicles for travel. Jonathan pays them an allowance based on the prescribed rate in section 7306. Does he need to report the allowances in their income?
13. Scenario – Reasonable Rates
The CRA answer is: No. Because Jonathan used the prescribed rates, the CRA deems them reasonable.
14. Automobile Allowances – Unreasonable Rates
The CRA considers a rate to be unreasonable when: It diverges by too wide a margin from the prescribed rates. It is a flat rate,
that is, it has no relationship to kilometres driven. It is a combined rate, that is combining a flat rate with a per kilometre rate for use of the same vehicle.
15. Automobile Allowances – Unreasonable Rates
Both flat and combined rates are taxable. You have to include the amounts in the employee’s income, and deduct CPP contributions, EI premiums and income tax.
16. Automobile Allowances – T2200
If your employees wish to claim certain employment expenses on their income tax and benefit return, you will have to complete and sign Form T2200, Declaration of Conditions of Employment, and give it to them.
17. Automobile Allowances – T2200
For Form T2200, you have to complete: Part A – Employee information; Part B – Conditions of Employment, and Part C – Employer declaration. Your employees must keep a completed and signed copy in case the CRA asks for it.
18. Automobile Allowances – Employment expenses
The expenses pertaining to automobile or motor vehicles that your employee can deduct include: Fuel (gasoline, propane, and oil); Maintenance and repairs; Insurance; and license and registration fees.
19. Automobile Allowances – Employment expenses
If pertinent, your employee may also deduct: Capital cost allowance - Eligible interest paid on a loan used to buy the motor vehicle - Eligible leasing costs.
20. Automobile Allowances – Employment expenses
Your employee must enter these amounts in the “Calculation of Allowable Motor Vehicle Expenses” area of Form T777.
21. Automobile Allowances – Employment expenses
As Form T777 shows one enters vehicle information including total kilometres driven and those driven for employment purposes, as well as gross amounts of certain expenses which are totaled. Then one calculates the allowable percentage of expenses minus any certain repayments
to arrive at the allowable motor vehicle expenses.
22. Scenario – Under the Reasonable Rate
So, for reasonable rates, let’s say Robert is a controller at a food wholesaler. He gets a 38¢ per kilometre rate, that was negotiated in the last collective agreement, but is lower than the prescribed rates.
23. Scenario – Under the Reasonable Rate
The CRA notes that collective agreements do not supersede the Income Tax Act. Allowances that are too low are taxable, and must be included as income on a T4 slip. However, Robert could claim his motor vehicle expenses on his tax return.
24. Scenario – Under the Reasonable Rate
Robert must get a completed and signed T2200 from his employer, and he must complete Form T777, and include it with his income tax and benefit return.
25. Scenario – Flat Rate
Looking at flat rates, Let’s say that Jenny owns an office supply company. She has workers in store and on the road. She provides a flat rate of $600 regardless of kilometres driven. She wants to know if she should include that amount on her employees’ T4s.
26. Scenario – Flat Rate
Here the CRA notes that: The allowance is not considered reasonable since it is not connected to kilometres driven.
And so, the allowance is taxable and must be included on the employees’ T4s as income.
27. Automobile Allowances – Reporting allowances
You must report taxable automobile or motor vehicle allowances on your employees’ T4 slips. In box 14,
“Employment Income”, include the yearly total of the allowance and at “Other Information”, enter the amount and use Code 40.
28. Automobile Allowances – Reporting allowances
A third-party payer that provides taxable allowances to employees of another employer must report the benefits in the “Other Information” area at the bottom of the T4A slip.
29. Scenario – reimbursement
For reimbursements, let’s say James owns a grocery store. He has employees in store and on the road. He does not pay an allowance. He only reimburses what is on receipts.
30. Scenario – reimbursement
The CRA notes that repayment for amounts that employees spent on business are not taxable. However, employees must complete an expense report. These amounts do not need to be reported on T4 slips. Note that repayments for amounts that employees spent in connection to personal travel are taxable, and must be included on the T4.
31. Excluding Accountable Advances
Recalling that accountable advances are those where unspent amounts must be returned to the employer, there are four conditions to meet to exclude accountable advances to employees from their income: The first: There is a pre-established per-kilometre rate that is not more than a reasonable amount. The second: The rate and the advances are reasonable under the circumstances. The third: You document this method in the employee’s file. Lastly, no other provision of the ITA requires you to include the advances in the employee’s income.
32. Automobile Allowances – Keeping records
To help determine allowable expenses, one should keep records. Whether one uses an app or pen and paper, a logbook is essential to support deductions or claim expenses by demonstrating distances travelled for business purposes.
33. Automobile Allowances – Keeping records
The details required in a logbook include: Relevant receipts - a log of total kilometres driven for the year. A log of each work trip with: the date, destination, and purpose of the trip.
34. Automobile Allowances – Covid-19 Measures
As you are aware, the CRA has implemented many special accommodations and temporary measures for taxpayers to lessen the impact of COVID-19 under certain circumstances. These temporary measures do not affect the calculation or administration of automobile allowance benefits. However, the temporary COVID-19 measures may impact the calculation of standby charges and operating expense benefits in situations where employers provide an employee with an automobile. These measures are intended to reduce unanticipated tax outcomes to situations where an employee was not able to fully utilize their vehicle for business purposes in 2020 and 2021.
35. Automobile Allowances – Covid-19 Measures
As a temporary COVID-19 response measure, the CRA has implemented special rules for the 2020 and 2021 tax years. Where an employee has driven their automobile for business purposes more than 50% of the time in 2019, they may also be considered to have used their vehicle more than 50% for business purposes in the 2020 and 2021 tax years. These special rules apply when determining the eligibility for an employee’s reduced standby charge rate, and/or the optional method of calculating an operating expense benefit. Only employees with an automobile provided by the same employer as in 2019 would be eligible for this option. Please visit canada.ca for more details on these temporary CRA COVID measures.
36. Recap of pertinent information
Today, we discussed: Four common forms of vehicle allowances; Reasonable per-kilometre rates; Unreasonable per-kilometre rates; Flat rates.
37. Recap of pertinent information
And a combination of flat-rate and reasonable per-kilometre rate. We also looked at: employees being able to claim certain expenses, and keeping records.
Tax administration is as complex as life itself. If the content today doesn’t quite fit your situation, please - Visit our web site. Visit Canada.ca/cra-liaison-officer to get free tax help from a liaison officer. Call CRA’s business enquiries line at 1-800-959-5525. You can also go to canada.ca/cra-videos where you’ll find all our business webinars. We’ve come to the end of our webinar.
Thanks for joining me today. I hope it’s been helpful. Stay tuned for more webinars in the coming months! Good bye.
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