Automobile Travel Costs

Not that meal expenses are no longer an issue, but I want to continue the exposure of our duplicitous income tax system and its impact on Canada Truck Operators.
The vast majority of operators in Canada are self employed. It’s not that there was much of a choice when operators became popular in the 1980’s. It was the cheapest and most obvious option at the time. However, the quickest and cheapest option is not always the best choice. I’m not blaming those who decided the trend because it seemed pretty obvious at the time.When a business chooses self employed status they must follow the rules and regulations associated with that method. Unfortunately comparing a self employed business with employer-employee agreements is rather sobering. The restrictions and benefits are just not the same. The primary benefit of self-employment is the ease of entry and the ease of exit not the efficiency of taxes or even recordkeeping.
Vehicle travel costs or business use of personal vehicle in the self employed method has radically different requirements than the “estimated reimbursement for job related costs” method. For example: fuel receipts, maintenance receipts, insurance and depreciation costs are all needed for self employed records, however non of that is needed for the estimated method.
If you use a personal vehicle for business travel there is one primary question that must be asked. Considering all the expenses how much is personal and how much is business? Personal miles are not tax deductible (obviously) so the system has to be able to compare them to the tax deductible business miles.
This brings in the most loathed aspect to personal vehicle business travel. On top of keeping every kind of receipt applicable to the vehicle, the self-employed business owner must keep a vehicle log that keeps track of both personal and business miles. It’s not an unreasonable request. There must be a way to calculate the ratio or percentage of personal to business in each vehicle used. At the end of the year or period the percentage is applied to the total of all receipts and expenses. For example if, over the period, 18% of all miles is business than only 18% of all expenses/receipts are tax deductible.
That’s a lot of paperwork, a lot of details needed to be recorded, sometimes every day. This method is about as labor intensive and time consuming as possible. If a business owner alternates between two or more vehicles then separate receipts and separate logs are required for each vehicle. Bummer!
Even though many accountants coast to coast imply and even say log books aren’t necessary they most certainly are (under audit). The only reason auditors may overlook log books is ignorance, passivity, or generosity. Over many years and even decades disinformation about log books has led many self employed people to lax and irresponsible record keeping. But enough about the method itself, lets go to comparing benefits.
With a proper agreement in place, employees and employers have greatly reduced paperwork and greatly enhanced benefits. Whereas the self employed method works on actual costs (applying them as expenses) the employee agreements provide a deduction to the employer and cash to an employee (no receipts needed). What makes the method so beneficial is the dollar amount an employer can provide an employee for the use of their vehicle. See current rate chart .
Using Ontario as an example, an employee can receive 55.5 tax free cents per KM for each business KM driven (that's 90 cents per mile). Unless you have a Hummer or a Ferrari and doing break stands at every stop sign, using these rates you can make good after tax money. If you can drive your vehicle for less than 55.5 cents per KM in Ontario the difference is pocketed tax free as a "nontaxable benefit.. pretty cool!
These two methods are dramatically different. The net after tax difference can be substantial. The average vehicle is usually able to perform at approximately 2/3 of cost. That means a net after tax benefit of about $.19 cents per KM in Ontario.
Comparing the after tax benefit of the self employed method with the employee agreement method can be a journey with exponential results. Efficiency of your vehicle combined with the cents per KM rate determines the net after tax benefit. However, the average operator may not use their personal vehicle enough to provide HUGE savings, however if they record a considerable volume it may make hundreds and even thousands of dollars over a year.
This tax example is another illustration of how choosing your business tax method is critical to your annual tax bill.