Sunday, August 21, 2011

Business Owners: Don't forget the Tax-Free Car Allowance

As a business owner, you may receive a tax-free car allowance if you use your own car when performing your business duties. The Canada Revenue Agency (CRA) will consider the allowance non-taxable if it is based on a per kilometre rate that they consider reasonable. The CRA normally considers the allowance reasonable, if it does not exceed the rate set annually by the government. For 2011, the rate is 52 cents/km for the first 5,000 km of business travel and 46 cents/km for business travel over 5,000 km. For the Yukon, the Northwest Territories and Nunavut, the rate is 56 cents/km for the first 5,000 km of business travel and 50 cents for each additional kilometre. The allowance is beneficial because you only have to track the distance travelled on business, not all of the related car expenses.

If the allowance exceeds these amounts, or could otherwise be viewed as being unreasonably high, it may be wise to track actual expenses and kilometres driven, in order to substantiate this higher amount, should the CRA ever challenge it.

Also, note that any allowance not calculated wholly on a reasonable "per kilometre" basis, is in most cases automatically considered taxable by the CRA. This would be the case, for instance, if you received a flat dollar amount per month.

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