Before you buy a car for your business, you need to understand the tax implications and CRA positions. An informed decision will help you in better tax planning and save you from any unwanted tax consequences.
I have been receiving several inquiries about this category and questions from all dimensions about motor vehicle expenses cra. Let me try my best to cover as much as possible.
– Can I deduct my motor vehicle expenses?
– Where can you deduct your vehicle expenses on your tax return?
– Is there a limit on the price of the vehicle for tax purposes?
– Should I finance or lease my vehicle?
– Should I buy my car under my company name or in my personal name?
Can I deduct my motor vehicle expenses?
Yes, you can deduct your motor vehicle expenses for tax purposes. You also have the option to claim a reasonable per-kilometer allowance instead of actual motor vehicle expenses.
However, before I write, let me tell you that I am assuming that we are talking about passenger vehicles that you are using or intending to use that vehicle for your business purposes.
The question is where you can deduct your motor vehicle expenses from income reported on your tax return. For income tax purposes, you can claim your motor vehicle expenses in the following scenarios.
Types of vehicles for tax purposes
Motor Vehicle Expenses CRA, there are two types of vehicles that can be claimed for tax purposes as used in the business. Number one is “motor vehicle,” and the number two is “passenger vehicle.” If you are using a passenger vehicle in your business, certain limits will apply.
A passenger vehicle as defined by CRA may include –
– Coupe, sedan, station wagon, sports car, or luxury car
– The vehicle used in the business less than the prescribed percentage under the category of “motor vehicle.”
A motor vehicle is a vehicle used for more than the prescribed percentage in the business to transport goods, equipment, or passenger come under this category.
– Pick-up trucks used more than 50%
– Pick-up trucks with extended cab 90% or more
– Sport-utility vehicle 90% or more
– Van or Minivan more than 50%
– Van or Minivan used to transport passenger more than 90%
A passenger vehicle does not include an ambulance, police and fire emergency-response vehicles, emergency medical services vehicles, a motor vehicle you bought to use mainly (for more than 50%) as a taxi, a bus to transport passengers, or a hearse in the funeral business, a motor vehicle you bought to resell, or rent, or lease.
Types of expenses that you can claim for your passenger vehicle for tax purposes:
– Capital cost allowance (CCA)/depreciation if you purchased your car, subject to the maximum allowable limit, which is $30,000.00 for the cost of the car
– Interest expenses up to a maximum limit of $300.00 if you are financing your car.
– Monthly lease payment up to a maximum limit of $800.00 per month if you are leasing your passenger vehicle
– Fuel expenses
– Vehicle insurances
– Plate registration fees and driving license renewal fees
– Repairs and maintenance costs of your vehicle
– Parking fees
– Toll charges
You can buy a luxury vehicle for your business at any price and can use the vehicle for your business. However, the maximum cost you can claim is limited to $30,000.00 for tax purposes.
All the above expenses that you are entitled to claim in your business are to be prorated between your personal and business use of the vehicle. You are only entitled to claim the business portion of expenses. However, you can claim the full amount of your parking fees used for business purposes and the full amount of insurance if you have supplementary business insurance for your vehicle.
CRA considers it personal use when you are daily commuting from home to your work or business places.
Reasonable per-kilometer allowance
Instead of claiming the above actual expenses of your motor vehicle, you can claim the reasonable per-kilometer car allowance prescribed by CRA as cra auto allowance. However, you can not claim both.
CRA has prescribed the following rates for the 2021 tax year
– $0.59 / km up to 5,000 kilometers driven for business
– $0.53 / km exceeding 5,000 kilometers driven for business
If your employer is paying the car allowance based on the above guidelines, your employer must not deduct CPP, EI, or income tax on your car allowance.
You need to maintain a vehicle log in all situations, and CRA may ask you to provide that. If you are using FreshBooks, it has an app that you can install on your mobile that can track your mileage easily.
Should I finance or lease my car?
– As discussed above, when you are leasing a passenger vehicle, the maximum leasing cost per month is $800.00 allowed for tax purposes. That means a total of $9,600.00 you can claim in a tax year if you drove your vehicle 100% for business use.
– When you are financing your passenger car, you can claim 30% depreciation and interest, as discussed above. For example, the car’s cost is $30,000.00, 30% depreciation for the first year is $9,000.00 plus interest, a total of $9,300.00 that you can claim in the 1st year for tax purposes if you drove your vehicle 100% for business use. However, your claim for depreciation will reduce year after year as you claim depreciation on the vehicle’s Undepreciated Capital Cost (UCC).
– It looks like the buying option may be cost-effective for you, but a lower amount of tax-deductible expenses than leasing.
– In the case of leasing generally, if you drive more than 24,000 kilometers in a year, you end up paying extra fees for that.
– Under leasing, you have the option to dive a new car after every lease term.
– Depending on your situation, you may need to contact your account to find out which option is better for you.
Should I buy my car under my company name or in my personal name?
– In most cases, you should buy your vehicle in your personal name and then charge the corporation’s expenses for all business usages.
– In most cases, you will be using your passenger vehicle to commute from home to work, and that is personal use.
– If the car is in your personal name, then you are only claiming the expenses through your corporation for the vehicle used for the business.
– However, if the vehicle is in the name of your corporation, the proportion of expenses related to your personal use will be added to your personal income as an employee taxable benefit from your corporation.
– CRA considers it a “standby charge.”
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters. RKB a CPA(Delaware), CA(India), and CIA(USA) has over 25 years of experience in accounting and taxation in dealing with various countries in the world.
Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.