Questions and Answers – Vehicle expenses vs per km rate for Independent Contractors (Self-employed)
Question: I am self-employed. I subcontract out to a shipping company where each day I use my personal vehicle to deliver parcels. I was talking to other subcontractors, who work for the same company, and I’ve gotten some conflicting advice. One subcontractor (let’s call him Dave) gets his tax return prepared by an accountant and instead of deducting actual vehicles expenses (fuel, repairs, insurance etc), Dave tells his accountant his business mileage for the year and the accountant multiplies this mileage against a per km rate provided by Revenue Canada. Another subcontractor (let’s call him Bob) says that Dave’s accountant is wrong. Bob’s accountant told him that, as he’s not an employee, he can’t claim the per km amount. Bob keeps all of his receipts and deducts them against the income he earns. Dave’s method seems a lot easier. Who’s correct?
Answer: The scary thing here is that no matter what my answer is, we know one of them (Dave or Bob) is getting bad advice.
If Dave’s accountant is correct, Bob is not only doing a lot more work than he has to (in having to keep and sort his receipts) but he may be missing out on claiming the maximum deduction available to him. Whereas, if Bob’s accountant is correct, Dave is filing incorrectly and, in the case of an audit, the deduction may be disallowed and Dave may be assessed additional taxes, interest and penalties.
The answer, as to who is right and who is wrong, can be found in Revenue Canada bulletin IT521R (Motor Vehicle Expenses Claimed by Self-Employed Individuals) “¶ 8. To be deductible, “motor vehicle” expenses must be reasonable in the circumstances and supportable by vouchers. (The vouchers need not be filed with the individual’s income tax return; however, they must be retained for examination on request.) A claim by an individual for “motor vehicle” expenses calculated on a cents-per-kilometre (mile) basis is not acceptable.”
In other words, as Dave is a subcontractor (self-employed – not an employee), he is filing incorrectly by claiming a per km rate. You may want to tell Dave to talk to his accountant.
Important! For incorporated individuals, you are an employee of your company. As such, you can set up an employment agreement between the company and yourself specifying that the company pay you a per km rate for your mileage. Please note, it has to be your personal vehicle (not a company vehicle) and you have to keep a mileage log to support your claim. If Dave was incorporated, Dave’s company should have the contract with the shipper and hire Dave as an employee. Dave could then use a per km rate by using his personal vehicle.