Everything you Need to Know About Writing Off a Car for Business
One of the more common business expenses, especially for local small to medium-sized contracting companies, is automobiles. Choosing to purchase or lease your corporate vehicles and how those vehicles are used can significantly impact your tax situation.
If you’re considering a vehicle for your business, speak with your accountant to calculate how the vehicle will affect your bottom line.
Vehicle Use
For a leased vehicle, operating expenses and a portion of the lease payments used for the business are considered a tax deduction on your corporate tax return. However, if the vehicle is also used for personal use, it needs to be reported as a taxable benefit to the individual.
If the vehicle is used by a shareholder, the personal-use benefit can be recorded against their shareholder loan.
Vehicle Benefit for Employees
For employees who use a company vehicle for personal use, this means recording the vehicle use as a benefit on the employee’s T4. This is often why we see companies with fleet vehicles require employees to use personal vehicles to travel to and from work, leaving the company vehicles to purely business use.
The total benefit of the vehicle use must be included as part of the employee’s annual employment income and is subject to payroll deductions. This benefit is divided into a standby charge and an operating cost.
Standby Charge
Having an automobile available to an employee during the year is considered a standby benefit by the CRA. This is calculated at either two percent (2%) of the vehicle cost per month or at two-thirds (⅔) of the lease cost, prorated by the days the vehicle is available to the employee.
Operating Cost
Employees who use business vehicles for personal use must also report a taxable operating cost benefit. This is determined based on the number of kilometers driven for personal use multiplied by a mileage rate of $0.27 per kilometer. Any reimbursements by the employee for the use of the vehicle are subtracted from the taxable benefit amount.
When personal use mileage is less than 20,004 km per year and over fifty percent of the total mileage is for business use, the combined taxable benefit may be calculated at a lower rate.
Estimate Automobile Benefits
An online automobile benefits calculator is available from the CRA to help estimate the taxable benefit to employees or shareholders with access to business vehicles.
Vehicle Deductions for Businesses
As of January 1, 2022, the capital cost allowance program allows a deduction on purchased vehicles for business use of $34,000 (up from $30,000) and $900, plus taxes, per month for leased vehicles (up from $800/month).
In addition to the purchase or lease rates, operating costs can also be deducted on your corporate tax return for both purchased and leased vehicles. These expenses include consumables, registration, and licensing fees, insurance, and maintenance services.
In today’s climate of smartphones and tracking apps, it’s never been easier to track and calculate your vehicle’s mileage use. Our top picks for mileage tracking apps are TripLog, MileIQ, and Quickbooks. We recommend employees submit regular mileage reports throughout the year to avoid any major discrepancies at year-end and to ensure accurate reporting is available in the event of a review by the CRA.
Zero-Emission Vehicles
Depending on the nature of your business, you may be considering an electric vehicle. The government of Canada now offers rebates of up to $5,000 on a leased zero-emissions vehicle or a deduction of the full vehicle cost in the year the vehicle is purchased.
If you have questions about vehicle purchases, deductions, and usage, connect with our team here at McNabb Lucuk LLP and we’d be happy to help determine the options that are best for you and your business.