May 25, 2020
To successfully deduct vehicle expenses, a logbook of practice-related trips must be maintained.
Only motor vehicle expenses that are reasonable may be claimed. So, what is reasonable? Well reasonable is the pro-rata portion of practice-related kilometres driven measured against total kilometres for the period, expressed as a percentage.
What is a practice-related kilometre? In general, it is any kilometre driven to earn practice-related income. Some examples include trips to the bank, trips to meet a colleague to discuss practice-related matters, a trip to your accountant’s office or a trip to a conference.
Receipts must be kept in support of expenses if auto expenses are to be deducted.
For each practice-related trip, keep a log listing the following:
- Number of kilometres driven
- Purpose of the trip
Where more than one vehicle is driven for practice-related trips, record the odometer reading of each vehicle at the start and end of each year. (TIP: Create a recurring entry in your calendar set to January 2nd each year as a reminder.) If a vehicle change occurs during the year, record the date of the change and the odometer reading at the time of the change.
A simplified method is permitted by the Canada Revenue Agency. Maintain a full logbook for one complete year to establish a base year’s practice-related use of a vehicle.
In the subsequent year, you are permitted to use a three-month sample logbook to predict practice-related use for the entire year, as long as the usage is within the same range (within 10%) of the results of the base year. Health care professionals will have to show that the use of the vehicle in the base year remains representative of its normal use.
The practice-related use of the vehicle in the following year is calculated by multiplying the practice-related use as determined in the base year by the ratio of the sample period and base-year period. The formula for this calculation is as follows:
(Sample year period % ÷ Base year period %) × Base year annual % = Calculated annual practice-related use
Where the calculated annual practice-related use in a subsequent year changes by more than 10%, the base year is no longer considered to be an appropriate indicator of annual usage in that later year. In that case, the sample-period logbook could
only be relied upon for that three-month period. For the remainder of the year, the practice-related use of the vehicle would need to be determined based on an actual record of travel or alternative records, as described above. In these circumstances, the taxpayer will need to repeat the process to establish a new base year by maintaining a logbook for a new 12-month period.
A 12-month logbook reveals practice-related usage in each quarter as 52% / 54% / 46% / 47% and an annual practice-related use of the vehicle as 49%. In the following year, a logbook was kept for a three-month sample period, showing the practice-related use as 51%. In the base year, the percentage of practice-related use of the vehicle was 46%.
The practice-related use of the vehicle would be calculated as follows: (51% ÷ 46%) × 49% = 54%
In the absence of conflicting information, 54% would be accepted by the CRA as the practice-related percentage for the following year.
Vehicle log apps
If this sounds complicated and time consuming, you’re right. But now there are several apps available to track kilometres driven using your cell phone. And, many of them meet CRA’s detailed criteria. MileIQ by Microsoft is an example. It will track trips automatically as long as data access is available. However, this technology is not sufficiently intelligent to determine the nature of the trip, whether practice related or personal. So, you will have to swipe each trip as practice-related or personal. Also, these apps can’t determine if a trip is by car, train, Uber, et cetera. So, some details remain to be entered manually. However, this is easily done on the screen of your cell phone. If you forget, an email will be sent to you weekly reminding you of the uncategorized trips requiring your attention. A free version of this app is available, but its use is restricted to a monthly maximum number of trips, so a paid version is typically required. These types of apps are a must to successfully defend expenses claimed for the use of your vehicle.
How long should a log book be kept?
The full 12-month-period logbook must be kept for a period of six years from the end of the tax year for which it is last used to establish practice-related use.If you use more than one motor vehicle, keep a separate log for each vehicle that shows the total and practice-related kilometres driven. And, calculate each vehicle’s expenses separately.
If there are questions arising from this article, contact Jonathan Tucker. Contact information is set out below.