The Canada Revenue Agency (the “CRA”) has simplified its rules for vehicle logbooks. These new rules should substantially reduce the administrative burden imposed by the CRA’s previous rules.
Logbooks are used to support the business use of a vehicle that is used partly for business purposes and partly for personal purposes. For a taxpayer who owns a vehicle, the business use of the vehicle is relevant for determining the amount of vehicle expenses that can be deducted. For a taxpayer who uses an employer’s vehicle, the business use of the vehicle is relevant for determining the amount of the taxable benefit that must be included in the taxpayer’s income.
Taxpayers need to keep vehicle logbooks to protect themselves from audit and reassessment by the CRA. Some taxpayers mistakenly believe that in an audit, they should be “innocent” until proven “guilty.” Nothing could be further from the truth. If the CRA reassesses a taxpayer, the taxpayer must prove that the tax assessed is incorrect. Without good records, a CRA reassessment will stand.
To demonstrate the business use of a vehicle, the CRA has historically expected taxpayers to keep a logbook documenting the date, destination, and distance for every business trip made in a year. However, under its new rules, the CRA will allow a taxpayer to rely on a logbook that documents the business trips made in single three-month period of the year.
To take advantage of the new rules, a taxpayer must retain a previously completed logbook covering a 12-month “base year.” The base year can be any consecutive 12-month period, but it must begin in 2009 or a later year. Also, the vehicle usage in the 12-month period selected must be typical for the business.
For each year after the base year, the taxpayer must keep a logbook for a period of at least one continuous three-month “sample period.” With the results of the sample period logbook, the business use of a vehicle can be extrapolated for the full year using a simple calculation.
Under its new rules, the CRA will generally accept the business use calculated using a sample period logbook if the following requirements are met.
- The distance travelled and the business use during the sample period must be within ten percent of the amounts recorded in the corresponding months of the base year.
- The annual business use calculated for the vehicle in later years must remain within ten percent of the amount recorded in the base year.
If these requirements are not met, the CRA will not allow a taxpayer to rely on the sample period logbook. Instead, the business use for periods not documented in a logbook will have to be determined based on alternative records, such as appointment diaries or logs of service calls. Unfortunately, alternative records carry less weight with than CRA than logbooks.
While a sample period can cover any continuous three-month period in a year, cautious taxpayers will want to select the first three months of the year as their sample period. This way, if the results of the sample period are not within CRA’s allowable thresholds, the taxpayer will know that good records need to be kept for the remainder of the year. Also, if the percentage of business use for a vehicle is likely to change significantly from the base year, the safest course of action will be to keep a logbook for the entire year.
The new logbook rules do not alter tax law’s “guilty until proven innocent” principle. If the business use of a vehicle is a significant issue in your tax situation, you leave yourself at the mercy of an auditor if you do not keep a logbook. The new rules can, however, reduce the hassle of preparing the documentation required to prove your case to the CRA. In this respect, the rules are a welcome change in CRA policy.
- Ryan Green
The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.
