Using a vehicle for business purposes is very common, serving several key purposes such as transportation of goods and equipment, getting to client meetings and service calls, advertising and brand promotion, and so much more.
While using a vehicle for business is common, it is also essential to understand the tax implications that arise. Properly managing these costs ensures compliance with tax regulations while maximizing potential deductions. As a special note, the Canada Revenue Agency (CRA) reviews motor vehicle costs on a more frequent basis than some of other business expense accounts as they can be confusing to calculate / determine and some business owners can be overly aggressive with them.
Below is a guide to help business owners navigate the complexities of motor vehicle expenses and their tax implications.
Leasing vs. Purchasing a Vehicle
As a first step, corporations must decide whether to purchase or lease vehicles, as both options have different tax treatments:
Leasing: When a corporation leases a vehicle, the corporation can deduct lease payments for tax, subject to certain limits imposed by the CRA. The maximum deductible lease payment may be restricted if the vehicle’s value exceeds a certain threshold and this is to dissuade business owners from leasing and expensing overly luxurious vehicles as business costs. Leasing is pretty straight-forward and business owners can readily tell what their expense is going to be as it usually matches the lease payments.
Purchasing: When a corporation purchases a vehicle, the corporation can claim Capital Cost Allowance (CCA) on the purchase price of the vehicle over several years, along with interest on any loan taken to acquire the vehicle.
Both approaches have tax benefits, but the decision depends on cash flow needs and long-term business goals.
Capital Cost Allowance (CCA)
For a corporation that owns a motor vehicle, depreciation is claimed using Capital Cost Allowance (CCA). CCA is taken on any purchased capital asset such as furniture and equipment and for motor vehicles, they usually fall under Class 10 or Class 10.1, depending on the cost, but some other classes do occasionally apply.
Class 10: Motor vehicles and passenger vehicles that cost less than the limit set by the CRA ($36,000 plus sales tax as of 2024) are included here. You can claim a maximum of 30% of the vehicle’s undepreciated capital cost each year.
Class 10.1: Passenger vehicles costing more than the limit fall into Class 10.1, with a special rule that allows for a different calculation in the year of purchase or disposal.
Class 16: Taxicabs and automobiles used for lease and rent, and freight trucks over a certain weight limit are included here. You can claim a maximum of 40% of the vehicle’s undepreciated capital cost each year.
Class 54: Zero-emission motor and passenger vehicles (excluding taxicabs and automobiles used for lease and rent) has a higher limit than Class 10.1 ($61,000 plus sales tax for 2023). Several criteria must be met to be considered a zero-emission vehicle.
Class 55: Zero-emission taxicabs and automobiles used for lease and rent. You can claim a maximum of 40% of the vehicle’s undepreciated capital cost each year.
It is important to add any purchased business vehicles to the correct class so that the right CCA rate applies. As a note, CCA does not apply to leased vehicles.
Qualifying Motor Vehicle Expenses
Motor vehicle expenses are tax-deductible if they are incurred for business purposes. You can deduct motor vehicle expenses whether your corporation leases or purchases vehicles. Common motor vehicle expenses include:
Fuel and oil costs
Maintenance and repairs
Insurance premiums
Lease payments (if leased) - See above discussion
Depreciation / CCA (if owned) - See above discussion
Interest on loans used to purchase the vehicle
Licensing and registration fees
Parking and toll charges
As a special note, businesses should ensure they maintain clear records to support these expenses. Keep all receipts and invoices for a minimum of 6 years in case the CRA ever asks you to support your qualifying motor vehicle expenses.
Personal vs. Business Use
Corporations need to track how a motor vehicle is used if it serves both personal and business purposes. The Canada Revenue Agency requires that you only deduct the portion of motor vehicle expenses related to business use.
To accurately determine the business-use percentage of vehicle expenses:
Maintain a mileage log recording the kilometers traveled for both business purposes and personal use. Your log book will be critical and will be required in all instances of a CRA audit. If you don’t want to manually track your business and personal kilometers, try a mobile app like Mileage IQ (https://mileiq.com/en-ca).
Calculate the business-use percentage by dividing the kilometers driven for business by the total kilometers driven in the fiscal year of the corporation.
For example: If 20,000 kilometers were driven during the fiscal year and 15,000 of them were for business purposes, then 75% of the total qualifying motor vehicle expenses could be claimed as a deduction.
Taxable Benefits for Employees
When a corporation provides a motor vehicle to an employee for personal use such as commuting to work, it creates a taxable benefit. A taxable benefit arises even if some business use of the vehicle is expected along with the personal use. The corporation must report this benefit as part of the employee’s income. The value of the benefit is calculated based on:
Standby charge: Reflecting the benefit of having the vehicle available for personal use when it is needed.
Operating cost benefit: Covering the expenses for operating the vehicle for personal use, like fuel and maintenance.
Corporations must accurately report these amounts to avoid penalties and to ensure employees are correctly taxed for work benefits they receive.
Claiming Input Tax Credits (ITCs) - GST/HST Implications
Corporations that are registered for GST/HST can claim Input Tax Credits (ITCs) for the GST/HST paid on qualifying motor vehicle expenses used in business activities. However, ITCs can only be claimed for the portion of the expenses that relate to business use. See the above discussion on Personal vs. Business use. Keeping detailed records is essential to substantiate ITC claims.
Personal Vehicle Used for Business Purposes
When an owner/employee uses their personal vehicle for business purposes, the corporation can reimburse them using the CRA mileage method. The mileage method involves reimbursing employees based on the number of kilometers they drive for business purposes. Instead of tracking individual vehicle-related expenses (like fuel, maintenance, insurance, etc.), the employer pays a fixed rate per kilometer driven.
The Canada Revenue Agency sets annual limits for the non-taxable reimbursement of personal vehicle use. The CRA’s prescribed rates change each year and for 2024 they are:
$0.70 per kilometer for the first 5,000 kilometers driven for business purposes.
$0.64 per kilometer for each kilometer after the initial 5,000 kilometers.
This approach is simple and widely used because it helps ensure fair and tax-compliant reimbursements while accounting for the wear and tear, fuel costs, and other vehicle-related expenses the owner/employee incurs. Corporations who follow these rates ensure that reimbursements remain non-taxable for the employee and a reasonable expense for the business.
Record Keeping
To successfully claim motor vehicle expenses, corporations must maintain proper documentation, including:
Receipts for all vehicle-related expenses.
Detailed mileage logs that track personal versus business usage.
Documents to support any lease or loan agreements.
Proper record-keeping not only simplifies tax filings but also protects the corporation in the event of a CRA audit.
Conclusion
Motor vehicle expenses offer significant tax benefits for corporations when used for business purposes, but they require careful management and documentation. By understanding the tax rules surrounding motor vehicle expenses, businesses can optimize their deductions, avoid penalties, and ensure compliance with tax authorities. Whether leasing or purchasing, tracking personal use, or calculating CCA, taking a proactive approach to vehicle expense management will benefit your business in the long term.
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