CRA audits of automobile expenses
CRA has been aggressively adjudicating and in many instances denying all automobile related expenses of employees incurred with the concurrence of their employer. The basis for the denial is the lack of a proper log book, as well as enforcing the old standing policy that treated the trip from home to the office and back as personal driving. In order that the deduction was allowed, an employee would have to drive to the office and then attend at her client's office. He would then be required to maintain a proper log detailing the date of the trip, the client visited, purpose and distance.
CRA was quite reasonable and lenient with what they considered properly maintained mileage logs.
No more. I would strongly urge that mileage logs be properly maintained in case CRA comes knocking.
Another unreasonable position that CRA has taken lately is with the increasingly prevalent situation where an employee does not have an office at her employer's place of business and is required by her employment contract to maintain a home office and travel to her employer's clients or other locations.
The problem arises with the definition of when home office expenses can be deductible.
Section 8(13) of The Income Tax Act will allow the deduction if:
- The workspace is where you principally perform the duties of your employment or
- Used exclusively during the period in respect of which the amount relates for the purpose of earning income from the office or employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of the office or employment;
* Principally has been held to mean more than 50% of the time.
CRA is taking a hard line position that because the employee is on the road for more than 50% of the day, he or she does not perform their duties of employment more than 50% of the time at their home office and thus the entire deduction is denied.
It's easy to see the math but difficult to understand the logic. Just because the employee has left the office to visit clients, does this mean that it reverts to personal use? Does the portion of insurance, heat, hydro and other costs of maintaining this office cease at the time that the employee leaves the office? Have the employee's files and storage cabinets disappeared, only to re-emerge when the employee returns? Does an employee have to maintain an attendance log to determine how many hours he is in her office and how many hours he is on the road?
One could argue that nowadays with mobile internet, a person can conduct her duties of employment from her vehicle and thus it becomes an extension of her home office.
Is an employee that lives in the Toronto region (where driving time is 3 times longer) who is denied the home office deduction vs someone that lives in St. Catharine's (and that can visit her client and return to her home office in 1/3 of the time) fairly treated? Mathematically CRA's position is justified, but logically it is not.
So far no one has challenged CRA's hard-line position. So be aware of the perils, but also of the arguments that CRA is conveniently turning a blind eye to.