If you used a vehicle for business purposes last year, you might be eligible to claim allowable motor vehicle expenses on your CRA tax return. Keep reading to find out what you need to know about how to calculate business mileage in 2018.
What is Business Mileage?
Business mileage can be any distances you drive for the purposes of conducting business activities. A few examples of what might constitute a business drive include:
- Using your car to meet with prospective clients at a location other than your main office;
- Delivering physical goods to your clients (i.e., flower deliveries if you are a florist, meal deliveries if you have a restaurant, etc.);
- Using a vehicle to buy supplies for your business;
- Driving to concerts or other events if you are a professional musician;
- Any distances travelled if you are in the business of moving people. For example, this could include moving or delivering furniture. It could also involve driving for Uber or a taxi company.
If you are self-employed, any distances you drive to earn income are eligible to be deducted as business mileage on your CRA tax return. If you are employed by a company, you may be able to claim a business mileage deduction if you meet all of the following conditions:
- You were typically required to work for your employer away from your employer's regular place of business or in various locations;
- Your contract of employment states that you must pay for your motor vehicle expenses. Note that you are not considered to have paid for your motor vehicle expenses if your employer reimburses you for these expenses. The same is true if you refused a reimbursement or a reasonable allowance from your employer;
- You did not receive a non-taxable allowance for motor vehicle expenses. Allowances are generally non-taxable when they are solely based on a reasonable per-kilometre rate.
- You keep a record of Form T2200, Declaration of Conditions of Employment, which has been completed and signed by your employer.
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How to Claim Business Mileage
Your business mileage is used to calculate the motor vehicle expenses you are allowed to claim. In other words, you don't claim mileage, you claim expenses. That being said, if you use your vehicle for personal reasons and business purposes, keeping track of your mileage is the best way to figure out the share of expenses you can claim. If you think about it, this makes sense. Gas prices are always fluctuating, and your maintenance costs benefit your personal vehicle use as well as your professional vehicle use. Figuring out a percentage eliminates the need to split up individual bills. To figure out what percentage of your drives are business related, keep a logbook of all trips. You can do this manually by making a note of your odometer readings at the start and end of each tax year. Then, make a note of your odometer reading at the start and end of each business drive, and enter this information in a mileage tracker spreadsheet. At the end of the year, add up all of your business drives and deduct the kilometres you drove for business purposes from your total number of kilometres travelled. For example, if you drive 20,000 kilometres during the year and 10,000 of those kilometres are for business purposes, that means you can claim 50 percent of your vehicle expenses on your tax return.
But Wait, There's an Easier Way!
If you don't want to track every single business drive you make during the year, you can simplify things by using a mileage tracking app like MileIQ. MileIQ is like Tinder for business drives: swipe left to classify drives as personal, and swipe right to classify them as business related. The first year you claim vehicle expenses, you will need to keep a detailed logbook for an entire year. A logbook means keeping track of all of your business drives, including the date, destination, purpose, and the number of kilometres travelled for each trip. The process will give you an adequate representation of your vehicle use for the year otherwise known as your base year. Once you've recorded a base year, you can use a three-month sample logbook in later years. A quarterly sample logbook allows you to establish your business use for the entire year, as long as the sample months are within the same range as the base year (within 10%). To use the simplified logbook method, you need to be able to prove that your base year sample remains representative of your current use. If during a 3-month sample period, you find that you are within the 10 percent range of your base year, you can use the following formula to calculate the business use of your vehicle for subsequent years: (Sample year period percentage √∑ Base year period percentage) x Base year annual percentage = Calculated annual business use
Claiming Vehicle Expenses
Your calculated annual business use tells you the percentage of vehicle expenses you can claim. To claim your deduction, fill out Chart A on page 6 of Form T2125, Statement of Business or professional activities. This form allows you to input the amounts you spent on:
- Fuel and oil;
- Interest paid on a passenger vehicle;
- Insurance;
- Licence and registration;
- Maintenance and repairs;
- Eligible leasing costs for a passenger vehicle; AND
- Other expenses (i.e., tolls, parking expenses, etc.).
To claim these amounts, make sure to keep a record of all receipts. You do not need to send your receipts to the CRA along with your claim, but you should keep a record of them for six years in case of an audit. To make sure you stay organized, try taking photos of receipts and keeping them in a folder on your computer or external hard drive. Add up all of your vehicle expenses for the year. For example, let's say you spent: $1,250 on fuel and oil; $600 on insurance; $400 on your licence and registration; $500 on maintenance and repairs; $3,600 on leasing costs. That would mean you spent $6,350 to operate and maintain your vehicle during the year. If 50 percent of your drives were for business-related purposes, that would give you the right to claim a motor vehicle expense deduction of $3,175. It's important to note that if you want to claim motor vehicle expenses on your taxes, you can't simply estimate the percentage of your business drives. In other words, without a mileage logbook, you won't be able to claim vehicle expenses. To help you out, MileIQ has prepared a free business mileage tracker you can use to track your drives.
New Per-Kilometre Rates for 2018
Every year, the Department of Finance Canada announces the income tax deduction limits and expense benefit rates that apply to people who use a motor vehicle for business purposes. These rates are used by employers who pay employees an allowance based on a reasonable per-kilometre rate. CPP contributions, EI premiums, and income tax should not be deducted from these amounts. The reasonable per-kilometre rate for 2018 will increase by one cent to 55 cents per km for the first 5,000 kilometres driven, and to 49 cents per km for each additional kilometre. This is to reflect that the costs associated with owning and operating an automobile have increased by roughly one cent per kilometre since the last time this limit was last changed. In the Northwest Territories, Nunavut, and the Yukon, the reasonable per-kilometre rate is higher and is increasing to 59 cents per kilometre for the first 5,000 kilometres driven, and 53 cents for every kilometre above that. These limits have been set to reflect vehicle depreciation as well as the cost of fuel, financing, insuring, and maintaining a vehicle in those areas.
Main Takeaways
If you are planning on claiming a vehicle expense deduction this year, the most important aspects to remember are:
- Keep a record of your receipts for fuel purchases, vehicle maintenance and repairs, leasing costs, and any amounts paid for your licence, insurance and registration.
- Keep a mileage logbook detailing your business drives, including the date, destination, and purpose of each trip, along with the number of kilometres driven.
- Using your business mileage calculation, figure out your business use of vehicle percentage to determine your allowable vehicle expense deduction.
In short, if you are a freelancer or small business owner, anytime you use your personal vehicle for business purposes, that drive is eligible for the vehicle expense deduction. But, if you also use your vehicle for personal drives, you will need to keep a logbook to back up your claims.
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