One of the perks of being an entrepreneur is getting a nice car through your business. Instead of just paying out of pocket, what’s better than getting your business to pay for it and getting a tax deduction?
As tempting as it is, there are certain limitations that the Canadian Revenue Agency (CRA) imposes. Vehicle related deductions are also one of the most audited areas! So make sure to read the entire post to understand what your options are!
What is Business Purpose?
General rule of thumb is that you can only deduct the portion of the vehicle costs that are related to reasonable business use. Some examples of business uses are when you are:
meeting clients and attending conferences
purchasing supplies your business needs to operate
running errands for your business
visiting customers or clients
Alternatively, personal use cases in which vehicle related costs are not deductible are:
Driving from the office to the grocery store to buy dinner for your family
Driving to and from the office or place of work to home
unless it is established that the home is the base of business operations. If there is an office or other fixed place of business located elsewhere, the home is normally regarded as not being the base of business operations.
Types of Vehicle Tax Deductions
Purchasing a vehicle → take depreciation or Capital Cost Allowance
Lease a car → take eligible leasing costs
General vehicle expenses such as:
fuel and oil costs
electricity costs for zero-emission vehicles
license and registration fees
insurance
interest on money borrowed to buy a motor vehicle
maintenance and repairs
parking is 100% if specifically related to business, otherwise if personal, not deductible
costs of getting into a car accident is 100% if specifically related to a business trip.
How to Structure Vehicle For Business Use
As a Self-employed, you can:
Buy the vehicle and take the business use % relevant for depreciation or eligible leasing costs, as well as vehicle expenses.
As a Corporation, you have the following options:
The Corporation buys or leases the vehicle, and taking appropriate deductions. → For personal use, the Employee would need to include it in their taxable income.
The Employee has a personal vehicle that they use for business purposes on behalf of the corporation/ → Corporation could provide allowance to employee for business use.
Buying vs Leasing
So one of the most popular questions that get asked is whether to buy or lease? It’s actually not so simple to answer, because it would really depend on your specific situation. For example, some questions you should ask are:
How much do you expect to drive?
Do you plan to switch out your car every 2 or 3 years or keep it for the long-term?
What is your budget? Compare leasing vs. buying monthly payment options.
After you have considered the non-tax related questions, let’s jump in the tax deductions you can get from the two options:
Leasing
Monthly lease payment you can deduct is $800/month plus GST/HST, which increased to $900 plus tax starting on January 1, 2022 (check out the government's 2022 vehicle updates here).
So that means if your lease costs $500/month and you use the vehicle 80% for business purposes, you can deduct $400/month
However, if your lease is $1000/month, then you can only deduct a maximum of $900 if you use your car 100% for business purposes.
Note: If the vehicle is considered a “luxury” vehicle then there may be a limitation on how much leasing costs you can deduction. Check out the details of the calculations here.
Buying
You are not able to deduct the full cost of the vehicle right away. Instead you would need to capitalize and take depreciation expense based on CRA’s prescribed rate, called Capital Cost Allowance (CCA).
Depending on what vehicle type, there is a limit on how much cost you can capitalize. For most passenger vehicles, there is a cap of $34k as of Jan 1, 2022 (an increase from $30k). What this is telling you is that you can’t go buy luxury cars costing $100k and trying to deduct the full amount.
For zero-emission passenger vehicles, the allowable cost is much higher at $59k - this is telling you that the government is trying to incentivize you to buy electric cars to better the environment.
As part of the Budget 2019, you can take accelerated depreciation of 100% for eligible zero-emission vehicles (ie. $100% of the $59k cost, instead of the typical 30% depreciation rate) if bought after March 18, 2019 and before January 1, 2028.
Personal Use for Employer Provided Vehicle
When the corporation purchases or leases the vehicle, the employee needs to include the personal use portion in their taxable income. There are two components to include as taxable benefits:
1. Operating cost (ie. gas, oil, maintenance charges, repair less insurance and licenses):
For 2022, the benefit is equal to 29¢ per km of personal use.
2. Standby charge (ie. depreciation or wear & tear).
The calculation can get tricky so the CRA provides an online calculator you can use, which I will be linking here.
There is also a reduced standby charge if the vehicle is primarily used for business purposes: (i) more than 50% of the time and (ii) 1,667km/month or 20,004 km/year is not exceeded when using the vehicle for personal driving.
This actually makes a huge difference since the reduced is almost half of the standard standby charge.
Business Use for Employee Provided Vehicle
Alternatively, you can use your personal vehicle for business purposes and have the corporation provide you a “reasonable allowance rates” reimbursement based on number of business km driven in a year.
For 2022, the “reasonable allowance rates” are:
61¢ per km for the first 5,000 km driven
55¢ per km driven after that
In this case, there will be no other vehicle expenses are reimbursed.
Good practices
As mentioned earlier on, vehicle deductions are one of the most audited areas by the CRA. So it’s particularly important to keep all supporting documentation. Information you should keep on file are:
all receipts
# of km by recording odometer at the start and end of the fiscal period
total km you drive
the km you drive to earn business
details such as date, destination, and purpose.
I know it may sound a little daunting to keep track of everything, but there are softwares and apps out there that can make your life so much easier, such as snapping receipts and keeping track of your km driven.
Disclaimer: Note this post is not accounting nor tax advice and should be used for entertainment purposes only. Consult with your own accountant and/or tax advisor for specific advice related to your business situation and needs.