A per-kilometer automobile allowance which is not taxable to an employee is not deductible if it exceeds the following amounts. Note that where the automobile is driven in the Northwest Territories, the Yukon Territory or Nunavut, each amount shown is increased by 4¢.
A friend of mine owns a farm but has taken a job to add to the farm income. It is a permanent position and he is paid by the hour. His commute is approximately 100 km one way. Can he claim vehicle expense for his commute? Thanks.
Hi and thanks for your question. It does not look like your friend would be able to claim the vehicle expenses for this commute. Canada Revenue Agency considers the driving to and from work as personal, but there are some cases where the commute would be deductible. The following is an excerpt from the following link:
… which explains the deductibility of auto expenses. The paragraph below explains the situations when travelling from home to office is deductible.
“Although expenses incurred in travelling between different premises of the same business are deductible by an individual who otherwise qualifies, expenses incurred by the individual for the purpose of travelling between the individual’s home and place of business are not, unless it is established that the home is the base of business operations. If the individual has an office or other fixed place of business located elsewhere, the home is normally regarded as not being the base of business operations. The fact that all services are rendered at some other person’s place of business does not necessarily make that place the individual’s base of business operations. The individual’s home may be the base of business operations even though a room therein is not set aside and used solely for the purpose of earning income. The following are examples of homes that may be regarded as the base of business operations:
(a) the home of a specialist in anaesthesia who performs all office functions of the practice at home, takes emergency calls there, renders all services to patients at one or more hospitals and has no office or other accommodation at the hospital or at any other place other than the home;
(b) the home of an independent real estate agent who has an office there, has no business accommodation elsewhere and renders services to clients at their homes or at the sites of real properties; and
(c) the home of a plumber, electrician or painter whose office is at home where all supplies are kept, who has no other place of business and who renders all services to customers at whatever places are necessary to fulfill contractual obligations.
¶ 25. Travelling ‘in the course of’ carrying on a business does not include travelling from a place where one business is carried on to another place where an entirely different business is carried on. For observations on ‘Travelling to Rental Properties,’ please see the current version of Rental Income, a supplementary income tax guide.
¶ 26. By virtue of section 67, ‘motor vehicle’ expenses are not deductible to the extent they are unreasonable.”
I recently had my taxes done by [a professional tax preparation service] and they didn’t seem to up on home-based businesses. I was told I wasn’t able to claim (and receive back) my business expenses because my business income didn’t meet or come close to my expenses. I was involved with two different businesses and quit one. However, I’ve been told I can claim and get back all of my expenses as others in my line of business do so. I’m wondering how would I do this?
I’d like to go back to [the professional tax preparation service] with some instructions on how to do it so they don’t brush me off. I appreciate your assistance.
In general, if one of my clients has a business that has a loss I would report it on the tax return. It is not up to me to say you can’t use these expenses in your business, but it is up to you to be able to support those deductions as a business expense if Revenue Canada ever audits your books. When looking at my clients’ situations, I might, based on information that I have at that time, suggest that you might not want to deduct the losses from your income. You haven’t given me enough information to be able to say definitely what I would advise, but the following are some general guidelines.
Your income from a business does not have to cover your expenses before you are allowed to deduct expenses for your business. It is not unusual to have a business lose in its final year or in the first couple of years, and those expenses would be deductible from your income for that year.
In general you can deduct expenses as long as they meet these criteria:
As a rule, you can deduct any reasonable current expense you incur to earn business income. The expenses you can deduct include any GST/HST you incur on these expenses. However, since you cannot deduct personal expenses, enter only the business part of expenses on the form.
You cannot claim expenses you incur to buy capital property.
“Enter business part only” means that any of the following are not included as part of your expenses:
- Salary or wages (including drawings) paid to self, partner(s), or both;
- Cost of saleable goods or services that you, your family, or your partners and their families used (including items such as food, home maintenance, or business properties);
- Donations to charities and political contributions;
- Interest and penalties you paid on your income tax;
- Life insurance premiums;
- The part of any expenses that can be attributed to non-business use of business property; and
- Most fines and penalties imposed after March 22, 2004 under the laws of Canada or a province or a foreign country.
As this is a general rule, there are other things to look at. Has your home based business ever made a profit? Has income been generated over the years?
Depending on your circumstances I could conclude the same as the professional tax preparation service you went to, but in general you should be able to deduct the expenses for your home-based business. But again, you must remember that you must be able to back up these expenses if you do have an audit.
I hope this helps you in deciding if you should deduct your home-based business expenses. If you have any other questions, please feel free to send them along!
My wife and I have a numbered company in Alberta (1234567 Alberta Ltd). We reside in a community where the husband holds a good job. The wife owns a fitness club operating as XYZ Widgets (fictitious name, of course) in a neighboring community (50 miles), to which she commutes daily. As I understand it, Revenue Canada will not allow us to claim our vehicle for the commute as we “choose” to reside in this community and drive daily. My question is this … could we start another business
operating as Shelly's Widgets (providing we make an honest attempt at making money) in our community? That way she would have two businesses “operating as …” under our limited company and therefore allowing her to claim all travel expenses between towns?
information that you have is correct in that Revenue Canada will not allow the deduction of motor vehicle expenses between your home and your place of business. Normally, if you were self-employed, you would calculate all your motor vehicle expenses and then prorate them over business mileage to total mileage, but in an incorporated company the procedure is different. As long as you are reimbursed for actual mileage you do on behalf of the business, which is not unreasonable, then it is deductible in the company and you do not need to report it on you personal tax return. What this means is that if you are reimbursed for a flat $500.00 a month, no matter how many miles you drive, it would be considered unreasonable and you would have to report it in your personal tax return as income. But, if you are given the prescribed rate of .31 cents a kilometer then this would be considered reasonable and you would not have to report it in your personal tax return. But this still excludes your driving from your home to the business in the other town.
Your proposal to set up a new company offering to sell widgets in the community where you live and deducting automobile expenses for this would be allowable as long as you are given an allowance depending on the kilometers driven. Mileage could be deducted to the other town as long as you have customers in that town or prospective customers. The problem arises in that Revenue Canada has what they called a General Anti-Avoidance rule that can be used to disallow the expense. If the business’ sole purpose is to allow you to write off the automobile expenses between the two towns, this would not be allowed.
I would suggest that if you did this, you could write off mileage to the other town by prorating it between the two businesses, depending on some common area like sales on that day or another factor. The amount for the fitness club would not be deductible, but the other would. I would keep a fairly detailed log of who you went to visit and when for the second company, along with the mileage (start and ending kilometres) of each trip (this can be purchased at most office supply stores) that you have to prove what trips were made on behalf of the second business.
If I decide to register my business as a sole proprietorship under a name other than my own do I have to have a business bank account? I only want to have a business to write off all my expenses that go into running it but I don’t think I’ll make enough money to actually have another account other than my personal one. Can I still write off expenses and such just using my personal account while still having this business?
If you use a name other then your own you must register your business. Usually once you start getting cheques in the name of the business, you are not able to cash them without having a business account in that name. One way around this is to have the cheques payable to you instead of the business name.
Even if you decide not to register the business under a name other then your own, you can still write off expenses you incur to earn income. You would have to keep track of those expenses (with receipts kept) and a record of some sort of the income you have made (e.g. copies of invoices) while using your personal account. On your tax return, you would fill out a business
statement and record your income and expenses with the profit being added to your other income or a loss being subtracted from your other income.
Since we started out business a year ago, I reckon we have received $2 million cash from our customers. If this is the case, why do our accounts show $3 million, as it seems a bit dangerous to include sales we have not yet been paid for?
Accounting is done on an accrual basis, which means that you record transactions as they occur and not when you receive the money. This works for both income and expenses, so in your case the $3 million in sales is the actual amount of business you have done during the year (paid and not paid). Of course, when you look at your expenses it should show all expenses recorded in your accounting program even if they have not been paid.
The matter of only receiving $2 million in cash means that you have customers owing you $1 million which you have not received. This seems high (1/3 of sales) and maybe you should be consider reviewing your payment terms and credit policies currently in force. A review of the amount outstanding by customer should also be done and a provision should be made for amounts you estimate will not be recovered. (This would become an expense and would lower your profit). One of the easiest ways to speed up the collection of money from customers is to send them a statement every month showing outstanding balances, along with charging them a service charge on invoices past your terms. This charge may never be paid but it will hopefully make customers who are always late pay on time.
The use of a collection agency for accounts, which you figure will you have exhausted all efforts, may help in the collections of your really old accounts. The downfall with this is that you have run the risk of losing the customer for good, so this method should only be used in rare circumstances. You should talk to your accountant about approaches that would suit your business and industry better, as this is just general information on collection policies as a whole.
I have a small business that is incorporated and I do all of my own bookkeeping using Quickbooks and I do all of my own taxes. I keep it pretty simple – net income of my business is zero – so I file a T2 Short and I don’t file a CT23.
This year I would like to pay dividends from income of previous years that I already paid taxes on. But I am not sure how to report this on my Balance Sheet, and I am not sure if I can still file a T2 short. Can you help me?
Janet, when you declare a dividend you show it on the balance sheet as a liability (called Dividend payable). This amount also shows in the retained
earnings section of your balance sheet as a reduction in your retained earning. When the dividend is actually paid it is shown as a debit to dividend payable and a credit to bank. Once the dividend is paid, you must issue a T5 slip to the person who received the dividend.
The T2 short form can only be used in the following circumstances:
- The company is a Canadian-controlled private corporation.
- It has either a nil net income for tax purposes for the year or a loss for income tax purposes for the year.
- It has gross revenue for the year of $500,000 or less.
- It has a permanent establishment in only one province or territory.
- It is not claiming any refundable tax credits (other than a refund of installments paid).
- It did not receive or pay out any taxable dividends.
As you intend to pay out dividends, you would not be eligible to use the T2 short form but would have to use the regular form.
What sort of allowance is my employer allowed to give me for using my car for work-related travel?
Your employer is allowed to give any amount that it wants for the use of a car owned by you. However, Revenue Canada states that any allowance that is “unreasonable” is taxable to you. The question of what is unreasonable can be complicated, but it is safe to say that if the allowance has nothing to do with the actual mileage driven for business, then it is taxable.
Tax-free allowances must meet either of the tests below to not be included in your income:
- The allowance is based on kilometers driven in the course of your employment.
- No reimbursement for automobile use is provided in addition to your tax-free automobile allowance, except that you may receive automobile cost reimbursements in respect of supplementary business insurance, parking, and toll or ferry charges without making the allowance taxable.
If your allowance does not meet the two tests or is otherwise unreasonably low, you may add it to your income and claim the deduction for automobile expenses.
If your employer chooses to pay a non-taxable allowance, Revenue Canada does have a maximum prescribed rate, which in 1998 was 35 cents per kilometer for the first 5,000 kilometers and 29 cents per kilometer thereafter. Your employer can pay more than this, but Revenue Canada may question the reasonableness of this tax-free allowance.
For company owned vehicles, the rules are different and more complex and are dependent on the individual circumstances.
What is the best accounting program to use for my small business?
There are a wide variety of accounting programs that can be used for a small business. The three that Nevcon supports are:
- Simply Accounting
When you are looking for a program you should consider the types of transactions you are doing, any limitations of the actual programs and the ease with which you can use the program.
For most non-accounting people, ease of use should be the first consideration. Before purchasing a program, you should get a demo disk of the program so you can try it out for yourself. See if it is able to do the things you want it to do, by trying some of your daily transactions on the sample data. Finally, talk to your accountant before you buy to see what he or she recommends and if he or she will set up the accounting system for you.
Establishing the starting numbers for an existing business, in your accounting program, is just as important as having the right accounting software. If you are not sure how to set up the program with the correct numbers, it would be less expensive, more efficient and more accurate to have your accountant set it up for you.
Setting up small business systems is one area in which Nevcon can help you to successfully and seamlessly change to a computerized accounting system.