By L.Kenway BComm CPB Retired
Edited May 4, 2024 | Updated January 30, 2024 | Originally Published on Bookkeeping-Essentials.com in 2009
WHAT'S IN THIS ARTICLE
Overview | Detailed Logbook | Driving To Work | Simplified Logbook | CRA Mileage Alternative Records | Why Use Simplified Method | Which Method is Better?
NEXT IN SERIES >> Vehicle Expense Reimbursement Options
The Canada Revenue Agency (CRA) requires diligent tracking of mileage for the purpose of business deductions. If you use your personal vehicle for business purposes, you need an mileage logbook.
Whether you are an employee or self-employed, being able to write-off your vehicle expenses related to business use --- through employee reimbursement or auto allowances, or a self-employed tax deduction --- is a valuable perk you don't want to lose. To avoid CRA disallowing your vehicle expense tax deduction, you need an auto logbook to support your claim.
CRA requires meticulous (emphasis on meticulous) tracking of mileage for the purpose of business deductions. Here are seven key requirements:
By adhering to these requirements, you can demonstrate to the CRA that your claims for motor vehicle expenses are accurate and policy compliant, potentially reducing your tax liability. These requirements can change, therefore you should always refer to the CRA’s official resources or consult with a professional tax advisor for accurate information.
Let's look at them in more detail.
The CRA typically requires a detailed logbook of motor vehicle operations for the entire year.
You are allowed to keep a simplified logbook for a representative portion of time (CRA uses 3 months in their examples) and extrapolate the results for the entire year provided you meet the conditions set by the CRA discussed above.
With either method, you can track your business mileage the old fashioned way -- pen and paper, or using one of tech savvy mileage tracking apps out there.
Let's look at both logbook methods in more detail.
CRA requires a mileage logbook that diligently tracks business mileage to claim vehicle expenses if you are:
Your auto log should capture:
At the beginning of each year (January 1), you need to record your odometer reading. This figure becomes the last entry for your prior year log. It's a good idea to diarize this date so you don't forget.
Remember you are NEVER allowed to record your mileage driving to and from work. CRA classifies this as a personal expense.
You are allowed to add mileage for all your business errands such as going to:
To use a simplified logbook period, according to the Canada Revenue Agency (CRA) several conditions must be met:
Once the detailed logbook is kept for a complete year, you’re then able to maintain a simplified logbook for a shorter representative period. This period should correspond with the 12 month period. The data from the simplified logbook is used to gauge the business use percentage for the entire year.
On June 28, 2010, the Finance Minister announced a new simplified logbook for motor vehicle expense provisions.
In order to claim your business vehicle expenses using the simplified logbook method, you need to meet the conditions discussed above.
CRA mileage log requirements for a simplified logbook require a calculation based on a specific formula. The business use of the vehicle in the second year has to be calculated using CRA's formula as follows:
(Sample year period % ÷ Base year period %) × Base year annual % = Calculated annual business use
If once you have made your calculations, the number is more or less than 10 points off your base year, you cannot use the simplified system. You will need to keep a mileage logbook for the entire 12 months and try again next year. This is why it is probably best to use the first three months of your fiscal or calendar year as your sample period.
However, if the number is within the 10 points allowed by your base year, you are allowed to use the simplified system for the rest of the year. In the third year, you need to repeat your sample period and test again whether or not you are eligible to use the simplified mileage method of tracking your mileage.
The simplified method makes it a little easier to prove your claim as there are now alternative records that you can use as your audit trail to substantiate your claim and your guesstimates. This is what CRA has to say on alternative records for vehicle travel:
"The fact that a viable business exists is usually a strong indicator that a person incurred vehicle expenses, because it is extremely difficult to carry on a business without doing at least some driving. Claims for a very low amount of business use do not require extensive records to demonstrate business travel. As the percentage of business use and the related expense claims increase, more documentation, .... , is expected to be available."
Some of the things CRA will look at to establish the necessity for business travel in your business when an auto logbook is not available are:
The auditor will also look at:
Pre June 28, 2010 it would be tough going without a full year mileage log as your audit trail. It's very likely your deduction would have been denied or arbitrarily reduced. Under the old rules, this is how an audit could end up with a ruling like this fellow.
Feb 25th, 2009 Diaz vs. the Queen et al (Federal Court of Appeal) The taxpayer's auto claim was reduced by 72% because he did not have auto mileage logs to present to the court. Instead he produced an auto log from the 1999 taxation year and said this was the basis for his deductions. The court felt his method was too arbitrary and the business income did not reflect the need for substantial auto expenses. As there was not sufficient evidence to conclude the Minister's assessed mileage allowed was incorrect, the onus of proof was not met and the appeal was dismissed.
This is one area which is audited regularly and it will be a lot of work (interpret this as time and money) to defend your guesstimates without a full log book or a simplified log book. Your best defence is still a well documented defence.
These new rules mean that CRA expects you to be able to provide evidence demonstrating that the business trip claimed in your log was actually for business. You will need to show them appointment diaries or service call logs or other appropriate documentation.
Conclusion? ... Create your audit trail. Log it ... or open your business up to the potential to lose this valuable tax deduction! Your decision.
For me personally, it is hard to establish good habits. Once I've established the habit of tracking mileage in my logbook, I would find it tough to stop and start. For me, it would just be easier to always track my mileage once I've established the habit.
However, it is not the same for everyone. I'm guessing the main reason someone would likely opt to use a simplified logbook rather than a detailed logbook would be convenience. Maintaining a detailed logbook for every trip can be time-consuming and somewhat laborious. However, a representative simplified logbook provides much of the same information about the vehicle's usage without having to detail every single trip. This can save time and simplify the record-keeping process.
Please note, the use of simplified logbooks is not permitted unless the base-year logbook is maintained and can be submitted when requested by the CRA.
From the Canada Revenue Agency's perspective, both a detailed logbook and a simplified logbook can be acceptable if they meet their respective criteria. However, CRA's website states "The best evidence to support the use of a vehicle is an accurate logbook of business travel maintained for the entire year."
A detailed logbook, when kept properly, provides precise information about all business-related vehicle use. This can make it a more reliable record from the CRA's perspective because it leaves little room for estimation or error.
On the other hand, a simplified logbook might be used as long as it is based on a detailed logbook that has been kept for a full 12 month period, and if it accurately reflects the vehicle's use.
As previously mentioned, the CRA might require the detailed logbook from the base year to be presented upon request, even if a simplified logbook is usually maintained. Therefore, it's essential to always keep and preserve your base year detailed logbook.
It's also important to remember that even with a simplified logbook, some level of detailed record-keeping is necessary to ensure the sample period is representative.
Ultimately, the choice between a detailed logbook and a simplified logbook may depend more on your personal preferences, the nature of your vehicle use, and your ability to consistently maintain accurate and detailed records. Keep in mind that the primary goal is to create a reliable record of your business vehicle use to support your tax claims. Always consult with a tax advisor or the CRA directly for personalized advice when making choices about this valuable perk available to employees and the self-employed.
CRA has three distinct sets of rules for vehicles used for business purposes. Choose the one that fits your circumstances to keep on the right side of Canadian compliance requirements by learning about essential bookkeeping habits for audit ready books.