Bold Prediction: We will Have Flying Cars Before CRA Comes Up with Better Guidance for the New Rideshare Industry
March 7, 2020 aadolphAudits,CRA,Vehicles
Even though taxi owners have lost their battle against ridesharing, they still have a big tax advantage over their new competition.
This is because of the way the Income Tax Act categorizes automobiles.Under current income tax rules,taxi owners can write off the full cost of their vehicle. It restricts Uber and rideshare operators to a maximum vehicle value of $30,000.
Difference Between a Passenger Vehicle and a Motor Vehicle
According to the Income Tax Act, there are two types of automobiles:
Passenger Vehicles, which represent about 90% of the vehicles on the road. In tax speak, they are Class 10.1, subject to caps on how much of their cost can be written off. As of 2001, that cap is $30,000.
Motor Vehicles are automobiles specifically designed for work.Their full value can be written off. Taxis fall into this category. Vehicles used in rideshare businesses do not.
Here is a helpful tool that CRA provides to explain this.
Your ability to claim back GST on the purchase price depends both on the type of automobile, and whether it is owned by a sole proprietor/partner in a partnership, or in a corporation. A vehicle owned in a corporation and used in a business is eligible for the business to claim their GST back right away,as long as they use the vehicle over 50% for the business. Whether to incorporate depends on the type of vehicle.
CRA Needs to Provide Better Guidance
The government’s only guidance document so far in the UBER era is driven by the need to make sure they receive 5 cents for every dollar of taxi fare collected (13 cents in Ontario).
Bill C-44 amended the GST rules, but Income Tax rules are untouched.The only guidance so far, CRA GST Info Sheet GI-196 for ride-sharing services,is clear that for GST purposes, the rules that apply to taxis are the same rules that apply to rideshare operators. But it offers no guidance on income tax treatment.
Is an UBER the same as a taxi? Depends who you talk to.
Other Questions That CRA Should Answer
What happens if an individual is a rideshare driver for part of the day, then changes the use of the automobile to deliver groceries, or packages for Amazon, or something like that?
With ridesharing officially here, it won’t be long until CRA auditors will grapple with these very issues, if they aren’t already. Until then, new rideshare operators should consider incorporation for a faster GST write-off. And before you purchase a high-end vehicle, do some serious number crunching. It may be possible that leasing makes better sense than owning.
Owning a vehicle in the company and writing it off can be a trap if you get audited. It can also be the thing that gets you audited. The auditor will want to see a logbook, and you will need to prove your business use kilometers.
In my 25 years as a CRA auditor, I never once saw a vehicle logbook like the type you are supposed to keep. I was a nice auditor, and those were simpler times to be a CRA auditor. Today, if you don’t keep a vehicle log, especially with all the apps available to assist you, you will be eviscerated on auto expenses.
My Best Advice
Please, unless there is a strong financial case to own the vehicle in your company, DON’T. Instead, purchase an app (I use TripLog), and pay yourself 58 cents per business kilometre. The app is easy to learn and will learn your pattern.
Your company can deduct it as an expense, and the shareholder/employee doesn’t have to report anything on their personal taxes. And for GST, claim an input tax credit of 2.8 cents per km.This approach is much simpler, lessens your attractiveness as an audit target, and might very well save you in taxes.
You just need to run the numbers first. For more info about how to do this, drop us a line:
Resources on this subject:
- GST Info Sheet GI-196, GST and Commercial Ride-sharing Services;
- GST Memorandum 8.2, General Restrictions and Limitations;
- Passenger v Automobile Chart
Andrew Adolph is a CPA and former CRA auditor with 25 Years of experience. He helps businesses to not par any more in sales taxs than the law says they must and acts as an advocate for you if you are being audited, so you can fous on your business.