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Do you have a car and an incorporated business? Then probably you have asked yourself - how do I deduct the car use on my tax return?

Use of cars for business purposes is a popular deduction that people like to make. As people often share one car between personal and business trips, I am often asked – what is the best option to own a car under personal name and use it for business or own a car under business name and use it for personal needs when required?

The answer is that, usually, it is much simpler and more beneficial to own a car under personal name and claim tax free allowance from the business. The reason is that when car is made available to employee or shareholder by a business for personal use, it creates taxable benefits for the employee/shareholder on the personal tax return. Trips from home to the office are considered personal use. When other personal trips are added, the taxable benefit grows quickly. Also marginal tax on personal return is usually much higher than corporate. Therefore creating taxable benefit that would be taxed on a personal level is not a good idea. A much better option is to use own car for business purpose when needed and receive tax free reimbursements from the corporation. The allowance is not taxable if it is based on kilometers the car was driven. Allowance is calculated by taking the kilometers and multiplying by rate. The rate actually increased in 2014 to 0.55 cents for the first 5,000 km driven and 49 cents after that, making this option even more beneficial. The amount of the reimbursement is deductible for the corporation, reducing its taxable income.

Hopefully this provides a clarification to the common dilemma of car deductions.

So, drive safely and save on tax!