Top 5 Common Tax Audit Issues - Part 4

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Top 5 Common Tax Audit Issues – Part 4

May 20, 2014

Tax Question:

Top five common Corporate Income Tax issues faced by clients: Auto Expenses Not Recorded Properly

Facts:

Automobile expenses such as gas, insurance and repairs and maintenance are common expenditures that a corporation incurs in the course of business. It is also a common audit item as CRA are aware that many corporations do not record such expenses correctly.

Discussion:

The biggest issue with vehicle expenses is that often the personal usage of a vehicle is not properly accounted for. With vehicles owned by the corporation, it is correct to record all the related expenses in the company accounts, but a taxable benefit needs to determined based on the personal usage of that vehicle. This benefit is then added to the user’s T4.

Conversely, with a personally owned vehicle, we often see all the expenses paid by the corporation and treated as corporate expenses. Technically this is incorrect as you are using corporate cash to pay for a personal asset. A big concern of CRA. The usual correct treatment is to record these transactions as a shareholder loan account draw and replace the expense with an allowance based on a per km usage. Think of it as a reimbursement.

In either situation we have some suggestions to help manage the expenses and ensure you treat them correctly:

Keep a vehicle log showing for each travel day the people visited, the purpose of the trip and how many km were driven. CRA has recognized this is a time-consuming exercise and so allows you to extrapolate a full year of travel based on a 3-month sample.
Identify the costs associated with each vehicle and record them in separate accounts. This is especially important if you are running more than one vehicle as you can then accurately calculate the benefits or allowance on the correct vehicle
Take the odometer reading at the beginning and end of the year so you know the total km travelled during the year.
If you are going on vacation for a long period of time, and have a corporately owned vehicle, leave the keys and vehicle at the business premises, if practical. This is because you are only subject to a taxable benefit on vehicles you have access to. Giving up the keys shows that you do not have access to the vehicle even if you are in a different country.
Manage your daily driving to maximize your business km. Going direct from home to work is viewed as personal travel. Going from home to a client and then to work can be viewed as business travel. Inserting business-related activities on your commute seamlessly turns the travel from personal to business.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.