Most businesses could not operate without using a vehicle somehow and will purchase vehicles in the name of the business to be used as such. Whether the Canada Revenue Agency is going to allow them to write off the entire cost of a vehicle depends both on the type of vehicle and the extent to which it is used for business purposes. In many cases, there can also be personal tax consequences for whoever uses that vehicle, depending on the type of vehicle and what it is used for.
Two Types of Vehicles
The CRA places vehicles into two categories: motor vehicles and passenger vehicles. Most cars, station wagons, vans, and some pick-up trucks are passenger vehicles. Exceptions would be where the automobile was purchased for more than 50% of it’s use as a taxi, or in today’s lingo, ride-sharing. Vans used more than 50% of the time to transport goods escape being categorized as passenger vehicles.
The problem with being classified as a passenger vehicle is that there is a limit to the capital cost, interest and lease expense. They are also very closely scrutinized by CRA auditors who are looking to assess a taxable benefit to a shareholder or employee who takes the vehicle home or otherwise uses it for personal use.
Maximum Write-off and Standby Charge Benefit
The maximum cost of a passenger vehicle that can be written off is $30,000 – a number which has not changed since 2000. However, the formula to determine the amount of the taxable benefit to include in the shareholder or employee’s income is based on the original cost of the vehicle. If the vehicle was 18 years old, the taxable benefit would be based on what that vehicle was worth when it was purchased.
The benefit to be included in income is called a “standby charge” and is equal to 24% of the original cost of the vehicle, per year, prorated to whatever the percentage of person use is. Remember that CRA considers driving to and from the same work location every day as personal use.
To illustrate the effect, let’s assume the corporation owns a Mercedes that it purchased in 2015 for $100,000. You drive it to the same office every day, along with regular out-trips for business meetings. You maintain a logbook, but because of trips to the same office being considered personal, your usage of the vehicle for business versus personal was 50%. With the standby charge rules, you would be assessed a standby charge benefit equal to $100,000 x 24% x 50% = $12,000, at your highest marginal tax rate. Meanwhile, the maximum CCA the company will get to claim in 2018 for example is $4,095, at its relatively lower corporate tax rate.
In addition, the shareholder/employee will also have a taxable benefit on the operating costs of the vehicle that the corporation paid, which will also be prorated for personal use, based on vehicle usage records which you are required to keep.
Proving What the Vehicle Was Used For
Supporting the business use portion of the vehicle, CRA requires the use of a logbook. In addition to recording the beginning odometer reading each year, each business trip requires the following information to be recorded:
- Date
- Destination
- Purpose
- # of Kilometres
Mercifully, there are many great apps that track all of the above and more using the GPS in your phone. If you haven’t been keeping track but you have a Google account, you may be able to find your location history at https://www.google.ca/maps/timeline.
If your business travels take you to different locations, or even better, if they take you up country, then your business use percentage should be high enough to escape the standby charge and operating cost benefits. You will still need to maintain vehicle usage records to support it.
Bottom Line
The decision whether to have a vehicle owned by the business should not be made without considering the taxable benefits that could be assessed against you personally as shareholder, or even worse, an employee who is taking a company car home and probably does not know about these rules. There are better solutions available that your tax professional can show you.
