deducting car payments
Keywords that should come to your mind is “reasonable in amount”. If you are renting from your family or friends than you should ensure that rent is a reasonable amount. This is very important but not as important if you don’t know the landlord at all. What is a reasonable amount you may ask? Reasonable amount is any amount that will be paid by an unrelated party.
Rent paid for property used for business are deductible. This also includes any additional expense you may have on behalf of your landlord. For example, you may deduct property taxes as part of your rent payments providing your lease terms require you to do so.
What if the property you are renting is owned by a corporation in which you are major share holder?
This is where rent expense can get tricky. Once again number one rule is that Rent Amount should be reasonable, but you can not teat the rents as passive income that you could use to offset your losses from other passive activities. This kind of transaction is strictly prohibited by the law.
This kind of arrangements are great but sometimes it may not be clear if payments made are “Rent Payments” or “Down payment” for the purchase of the car. Make sure agreement clearly states what payments will be treated as rent and what will be considered as purchase or down payment.
Payments are not- deductible as rent if they are made under “conditional sales contract” which states that you will acquire the car after making the certain number of payments.
For example You lease a car for a period of three years. Your lease agreement provides that at the end of three years you have an option to buy the car and all payments made to date will be applied towards the purchase price. In this kind of situation, your payments will mostly likely be considered as purchase rather than lease payments.
Can you deduct advance rent payments?
No – you can not. You can only deduct the portion of the rent that applies to use of the rented property during the year.
Cost of cancelling the lease?
This is a deductible expense.
Improvement made to leased property?
Improvements you make to leased property ? This can be tricky calculation. Please make sure to consult a professional. You can deduct the improvements. However, improvements are depreciated over their recovery period defined by the law. Please note that you can not depreciated over your term of the lease.
Renting a portion of your home for business?
You can deduct the rent expense as “home office deduction”.
Get the most out of tax deductions for car expenses
Special to Financial Post
February 19, 2013 9:00 AM EST
Driving can be a big part of the business day for owners and their employees, and the costs of gas and other car expenses can quickly add up. It is in your best interest to make sure you claim all possible tax deductions for these expenses. The rules for these deductions are complicated, but the following highlights can set you on the road to tax savings.
Most people use the same car for business and personal travel but the deductible portion of your expenses depends on how much of your driving is for business, so it is important to keep careful track of the distances you drive for work purposes to verify your tax claims with the Canada Revenue Agency.
You can keep a log book or record business driving in your appointment calendar. The log must show the total number of kilometres driven and total business kilometres for the year. It should also include the date, destination, distance driven and the reason for each trip. Travel between work and home is normally considered personal use.
If you are self-employed and don’t carry on your business through a corporation, you can deduct your business-related car expenses from your business income. If you have a corporation and you own the car you use for business travel, the rules are more complicated as there are several options available for deducting business-related car expenses incurred by you and your employees. For this purpose, we’re assuming you’re acting in your capacity as an employee or officer of your company.
One option is to have your company reimburse you based on the number of kilometres you drive for business. For 2013, the CRA considers a reasonable amount to be a maximum of 54¢ a kilometre (up from 53¢ for 2012) for the first 5,000 kms driven for business in the year and 48¢ (up from 47¢) for each kilometre after 5,000. Your company can deduct the amount of this payment and it will not be considered a taxable employment benefit for you. In some cases, the company may be able to justify a higher amount. However, the company will still only be able to deduct the 54¢ per km, while all of the higher amount will be tax-free for the employee.
As a business owner, you might decide not to have the company reimburse your business-related car expenses. Instead, you can pay those expenses and deduct them from your employment income from the company. This approach can be beneficial because personal tax rates are usually higher than corporate tax rates, making the deduction more valuable to you personally than it is to your company.
For employer and employees, deductible expenses include fuel and oil, maintenance and repair, licence and registration fees, and insurance. You may also be able to claim a rebate of any GST/HST paid on these expenses.
Interest on loans or financing used to purchase the car, leasing costs and capital cost allowance for a car you purchased are also deductible but are subject to limits. Your interest deduction is limited to $300 a month. Deductions for lease payments are restricted to $800 a month, plus GST/HST/PST. The depreciation rate for capital cost allowance is 15% in the year you acquire the car, followed by 30% of the remaining balance in each subsequent year.
Another option is to have your company buy a car for your use. Because the tax rules in this situation are even more complicated than those reviewed, business owners often choose to use their own cars. Briefly, if your company buys you a car, it will deduct all the related expenses but you will have to pay tax for your personal use of the car in the form of a taxable benefit called a standby charge and an operating cost benefit for expenses the company pays such as gas and insurance.
I advise clients whose companies buy vehicles to ensure they have sufficient insurance to cover all possible risks to the company and review the policy regularly to ensure it keeps up with insurance trends.
Whichever option you choose, good record keeping is vital to successfully claiming all the tax benefits to which you are entitled.
Don MacDonald is a tax partner with KPMG Enterprise in London, Ont.