Right around this time of year, you’re probably seeing a lot of car commercials on TV. Car dealerships are gearing up for new models and looking to unload inventory. Perfect time to get a shiny new car and expense it to the business, right? Before you step into any car dealership to take advantage of those end-of-year car deals and decide to write it off as a business vehicle expense, you’ll need to consider several things.
First, there are two types of motor vehicle expenses in terms of income tax in Canada:
- Expenses related to the use of a vehicle (which you claim on line 9281 – Motor vehicle expenses)
- Expenses related to purchasing a motor vehicle (which you claim as Capital Cost Allowance).
Here, we will speak mainly about claiming CCA on your vehicle purchased for your business:
Capital Cost Allowance (CCA)
Businesses in Canada can claim capital cost allowance, a tax deduction for the cost of depreciable property that you use for business purposes. There are different classes of depreciable properties, with most vehicles falling under Class 10 — as such, you’re able to claim CCA on your car.
If you’re thinking about buying an electric or hybrid vehicle, you’re in luck. The Government of Canada, via the 2019 Federal Budget, allows for a temporary enhanced first-year CCA rate of 100% for eligible zero-emission vehicles purchased after March 18, 2019 for use before 2028.
What does that mean? This change allows you to deduct the full cost of the vehicle, to a maximum of $55,000 plus sales taxes, in the year you purchased it.
But before you bite the bullet on purchasing that new car, in order to be eligible for this deduction, your vehicle must be new (not used), fully electric, a plug-in hybrid (with a batter capacity of at least 15 kWh), or fully powered by hydrogen. It must also fall under the “motor vehicle” classification as defined by Canadian tax laws. Keep in mind that since this deduction is only available in the year you purchase the vehicle, you’ll want to consult with your accountant about the ideal time to do so.
You may be wondering if your employees can also benefit from the aforementioned zero-emission vehicle deduction. In short, yes. As long as you fall under one of these three groups, you’re good to go:
- Business owners who use the vehicle(s) for business purposes
- If your business is structured as a partnership, your partner who uses the car for work
- An employee who uses the vehicle for work
If you aren’t planning on purchasing a zero-emission vehicle, in certain situations, the Canada Revenue Agency (CRA) will allow the taxpayer’s spouse to purchase the vehicle, but the taxpayer can deduct the expenses if it’s used for business purposes. The best way to understand if your unique situation would be eligible is by speaking with your accountant. They know the ins and outs of your business’s finances and should be able to recommend the right path for you.
Calculating CCA for your Business Vehicle
Sole proprietors or partnerships can claim the CCA on line 9936 of Form T21255. Corporations must do so on their T2 corporate income tax returns. In terms of calculating the CCA for your business vehicle, however, the calculation is the same for all forms of business structures in Canada.
Like we spoke about earlier, there are different classifications of vehicles under tax law: find out what yours would fall under as this affects the amount you can deduct for CCA.
If you wanted to purchase a vehicle for your business now, as the discounts are aplenty, you should do so if the end of the calendar year coincides with the end of your business’s fiscal year. In this scenario, you can claim 50% of the CCA for the entire tax year, despite only buying the car at the end, and in the following year, you’ll be able to get a full 100% CCA cost on the car.
Who knew writing off your business vehicle expenses could include so many nuances? You can maximize the tax deductions if you have an experienced team of tax specialists and accountants on your side. At Qmulus, we combine cloud-based software with the expertise of our accountants and tax professionals to bring you informed and efficient tax advice . If you’re looking to tax plan for the year ahead and/or have any questions about claiming CCA, give us a call at 647-476-2145 or schedule an appointment with us.