A common concern among our clients is the Canada Revenue Agency (CRA) rules pertaining to automobiles. A few of the most frequently asked questions are as follows:
Should I buy or lease my vehicle?
This is actually a very complex question and entire books have been devoted to the subject. It depends on many variables such as:
How long do you intend to drive this vehicle?
What kind of interest rate is implicit in the lease?
Do you prefer to always drive relatively new vehicles?
What is the buyout option of the lease? When is it?
What is the finance rate you can get if you buy?
How important is pride of ownership to you?
This is just a very partial list. There are many other variables to consider as well.
Our advice is to get the best deal you can. You are allowed to deduct expenses (within limits – see below) regardless of whether you buy the vehicle or lease the vehicle.
Should I buy the auto corporately or personally?
The short and sweet answer is to buy it personally. You can claim the exact same amount you use for business purposes regardless of whether you own it personally or corporately. The reason you should always buy vehicles personally is a nasty tax rule called the standby charge and operating cost benefit. Basically, this rule states that if the auto is owned by the corporation and you cannot prove that you use the auto at least 90% for business, then you must calculate a standby charge and operating cost benefit and add these two amounts on to your T4 slip – i.e. it’s taxed like additional employment income and it can add up to a very substantial amount each year. To avoid this, you simply should buy the auto personally.
What is considered business usage?
The CRA’s long held assumption is that driving from your home to your place of work and back again is considered personal usage. However, the following are considered business usage:
A) Driving from home to your client’s place of business and then to your work
B) Driving from home to your client’s place of business and back home again
C) Driving from your work to your client’s place of business and then home
So this means you should schedule as many business meetings at your client’s place of business as you can on the way to work (beginning of the day) and on the way home from work (end of the day).
The CRA expects business usage to be calculated based on total km for business usage divided by the total km driven during the year.
What records do I need to keep?
The Income Tax Act does not set out specific documentary requirements for recording the usage of a vehicle. The general rule is that a person must retain records that would enable an objective determination of the business usage.
The best form of records to keep is a log book whereby you record the date, the number of km, the destination and the reason for each business trip.
Recently, CRA has begun to accept sample periods and then allow you to extrapolate the results. However, even this method requires one full year of logbook records be kept as a “base” year. Then, for subsequent years, you can keep a log for a 3 month period and extrapolate. However, the over-all percentage change from the base year cannot exceed 10%.
Having said all that, claims for a very low amount of business usage normally do not require extensive records to demonstrate business travel. Normally, the higher the business percentage usage claimed, the more documentation is expected to be kept.
What are the kinds of expenses I can deduct?
You can deduct any expenses that relate to the business usage of your automobile such as:
1) Gas and oil
2) Repairs and maintenance
3) Insurance
4) License fees
5) Interest (if you financed the purchase of a vehicle)
6) Tax depreciation (called Capital Cost Allowance) based on percentage of purchase price
7) Lease costs (if you leased the vehicle)
Again, these expenses are based on the total business usage km divided by the total km driven for the year.
Are there limitations on what I can deduct?
The short answer is yes. The CRA does not allow you to buy a Lamborghini for hundreds of thousands of dollars and claim high financing, tax depreciation or exorbitant lease costs on those.
For claiming interest expense on automobile purchases, the limit is $300 per month.
For claiming lease costs, the limit is $800 per month.
For claiming tax depreciation, the limit on which it can be based is $30,000 plus GST/PST/HST.
Furthermore, the limit for claiming tax depreciation is 30% of the original purchase price (15% in the year of purchase).