As a business owner, the decision to buy or lease a vehicle under a corporation in Canada can be complicated and requires careful consideration. In this blog post, I will go over the difference between leasing versus buying a car for your business so you can make an informed decision. I will cover topics such as the tax benefits under each option, business use vs personal use of a company vehicle, tax implications on personal use, documents required to claim business vehicle expenses, and more; so you can determine which option is right for you.
Leasing a Company Car from a Tax Perspective
Leasing a company vehicle can be highly beneficial from a tax perspective as you can deduct the business use of the eligible leasing costs from the corporation’s taxable income. Each month, you are allowed to deduct a maximum of $950 plus GST/HST, which adds up to an impressive annual deduction of up to $11,400 before taxes. Note that the monthly lease payment deductible limit of $950 applies to new leases starting January 1, 2023.
To illustrate, if the business has a yearly lease payment of $7,800 and your business use is 70%, you can deduct up to $5,460 from the company’s taxable income.
Under the Canada Revenue Agency (CRA) guideline, vehicles costing over $36,000 before GST/HST are considered luxury vehicles. Thus the lease payments on vehicle MSRP over $36,000 will be gradually reduced.
Leasing a Zero-Emission Business Use Vehicle
Tax incentives offered by the Zero-Emission Vehicles (iZEV) Program of up to $5,000 are available to businesses for leasing a zero-emission vehicle (or electric car). The lease term must be over 12 months, and the base model Manufacturer’s Suggested Retail Price (MSRP) must be less than $55,000, with higher-priced trims up to a maximum MSRP of $65,000.
The incentives will be prorated if the lease term is less than 48 months. For example, a business vehicle with a 36-month lease term will be eligible to receive 75% of the incentive. On the other hand, a lease term of 48 months is eligible to receive the full $5,000 incentive.
Buying a Company Car from a Tax Standpoint
The primary difference between buying and leasing a vehicle lies in the mechanism of how tax deductions are taken. When a car is purchased or financed, the cost is deductible through something known as Capital Cost Allowance (CCA), or more commonly referred to as tax depreciation. This is because when a car is leased, the business does not ‘own’ the passenger vehicle and thus cannot claim CCA on it.
Depending on the vehicle purchase price, a distinct CCA class is assigned to the vehicle. Effective 2023, Class 10 is assigned to a passenger vehicle costing $36,000 or less before taxes, whereas Class 10.1 applies to vehicles over $36,000. Both CCA classes are eligible for tax deprecation at a rate of 30%.
Let’s look at an example:
If you buy a car for $28,000 before GST/HST, the passenger vehicle is assigned under Class 10, and you can claim 30% tax depreciation of the undepreciated value each year. However, if you’ve acquired a more expensive passenger vehicle, say $40,000, the vehicle will be assigned to Class 10.1, and the 30% tax depreciation is limited to $36,000 before taxes. In other words, you cannot claim tax depreciation on the amount exceeding the $36,000 threshold.
Additionally, if you’ve taken out a loan to purchase the car, you can deduct up to $300 per month of interest charges in relation to your financing payments.
Timing of Vehicle Purchase
Timing plays an integral role when buying a business vehicle. For example, if you buy a car before the end of the fiscal year (e.g. December 31), you can claim the same deduction as if you purchased the vehicle at the beginning of the fiscal year (e.g. January 1). In either scenario, the tax deduction may be reduced by 50% (known as the half-year rule) in the first year of depreciating the business vehicle.
When leasing a car, if you enter into the lease contract early in the fiscal year, your monthly lease payments become eligible for tax deduction sooner. This can result in higher overall tax deductions for the year. If the lease contract commenced near the end of the fiscal year, a smaller deduction would be available as fewer lease payments would have been made for that year. It’s important to consider the timing of your purchase or lease when comparing the tax implications.
Buying a Zero-Emission Business Use Vehicle
Buying a zero-emission passenger vehicle (or electric car) for business is also eligible for the $5,000 incentives offered by the Zero-Emission Vehicles (iZEV) Program. The base model Manufacturer’s Suggested Retail Price (MSRP) requirements must also be less than $55,000, with higher-priced trims up to a maximum MSRP of $65,000.
While a regular gas vehicle is eligible for Capital Cost Allowance (CCA) or tax depreciation at 30%, a zero-emission passenger vehicle is assigned to Class 54 and is eligible for additional tax write-offs. There is an enhanced first-year CCA deduction of up to 100%, and this tax incentive is gradually phased out until 2028, when the CCA is reduced to 30%. In addition, tax depreciation can be taken on electric vehicles of up to $55,000 before GST/HST compared to the $36,000 limit imposed on regular gas vehicles. As a result, tax deductions are generally higher for an electric car.
It is important to note businesses that choose to receive the $5,000 incentive from the iZEV Program cannot use the additional tax write-offs under Class 54. Businesses must only use one or the other.
Tracking Business Use vs Personal Use
If the company car is solely for business use, the entire motor vehicle expenses would be eligible for a tax deduction.
However, if the vehicle is leased and there is a personal use component, the corporation can only deduct the portion of the lease payments and other vehicle operating expenses related to business use.
Similarly, if the vehicle is purchased and there is a personal use component, the eligibility on the Input Tax Credit (ITC) claim in relation to the GST/HST paid on the vehicle may be impacted. The CRA requires more than 50% of the vehicle used in commercial activities for the corporation to qualify for the full ITC claim.
As a result, business use vs personal use needs to be tracked appropriately regardless of whether you purchase or lease a company vehicle.
Let’s look at a few examples of what is considered business use:
- Travel from your workplace to your client’s office
- Travel from your workplace to a store to purchase office supplies
- Travel from your workplace to a restaurant for a sales meeting
Here are a few examples of what is considered personal use:
- Travel from your place of residence to your workplace and vice versa
- Travel from your workplace to a restaurant to buy food for your family
When the Business Pays for 100% of the Motor Vehicle Expenses
The corporation often paid for all motor vehicle expenses, such as gas, insurance, repairs and maintenance, and licence and registration fees.
If the car is used for both personal and business purposes, the personal portion of the expenses must be excluded from the company’s tax write-offs. This is because only the costs associated with business use can be deducted.
To determine the portion related to personal use, you must track the number of personal and business kilometres driven for each trip. The personal kilometres would be divided by the total kilometres driven to determine the percentage related to personal use.
The personal portion of the motor vehicle expenses is then reallocated to the shareholder loan account. This unfortunately means there is no deduction for the company and can create a taxable benefit for the business owner if the shareholder loan account has a debit balance and is not repaid within 1 year after the corporation’s fiscal year-end.
If you pay yourself a salary via payroll (i.e. business owner is also an employee), the portion of the expense related to personal use could result in a taxable benefit. The additional dollar amount is added to your T4 slip, which means you would have to pay extra personal tax on the total taxable benefit.
Taxable Benefits on Company Vehicle Used by an Employee
Often businesses would require their employees to use the company vehicle to perform employment duties. However, taxable benefits may need to be reported if the company vehicle is made available to an employee for personal use. This applies to both a company-leased and a company-purchased vehicle.
An employee’s automobile total taxable benefit is recorded on the annual T4 slip and is subject to income tax, CPP, and EI deductions. This benefit comprises two elements: a standby charge and an operating cost benefit, both of which must be taken into consideration when filing payroll taxes.
Standby Charge Taxable Benefit
The standby charge benefit acknowledges that the employee is receiving a benefit by having the vehicle made available to the employee throughout the year.
For a company-purchased vehicle, the benefit is calculated at 2% per month of the vehicle cost.
For a company-leased vehicle, the benefit is calculated at 2/3 of the lease payment.
In both scenarios, the benefit is adjusted based on the number of days the vehicle is made available to the employee in the year.
It is important to note if the employee drives more than 50% for work-related purposes and accumulates fewer than 20,004 km per year for personal use, the standby charge benefit may be reduced.
Operating Cost Benefit
The operating cost benefit acknowledges that the employee is receiving a benefit since the employer has paid for operating expenses for the vehicle made available for the employee’s use.
The operating cost benefit is calculated based on the number of personal kilometres driven in the year multiplied by the CRA’s prescribed rate. For 2023, the benefit is 33 cents per kilometre of personal use.
Similar to the standby charge, the operating cost benefit may be reduced if the employee drives more than 50% for work-related purposes. The reduction is calculated at 50% or half of the standby charge benefit less any reimbursements made by the employee to the employer.
Information Required to Calculate the Taxable Benefits
Calculating the taxable benefit for standby charge and operating expenses are fairly complex. You can use the CRA automobile benefits online calculator to estimate the taxable benefit for the applicable employee.
You would require a few key pieces of information for the taxable benefit calculation: the vehicle purchase cost or monthly lease payment, the number of days the company vehicle was made available to the employee during the year, the total number of kilometres driven for business use, the total number of kilometres driven for personal use, and reimbursement amounts made by the employee to the employer.
Record Keeping for Vehicle Expense Claim
Businesses must document their expenses and track vehicle usage when claiming write-offs on the tax return. The CRA has strict criteria on what it requires as proof of these expenditures and the business use of the particular vehicle in question. A full logbook needs to be maintained, and the log listing needs to contain the following:
- Date of each business trip
- Destination of the trip
- Purpose of the trip (e.g. client meeting)
- Number of business and personal kilometres driven for the trip
- Odometer reading at the beginning and end of the fiscal year
You can make notes in a traditional paper logbook, or you could use a mobile app to monitor and store this data.
Using a Personal Vehicle for Business
If buying or leasing a vehicle under the corporation is not feasible, you can also use your personal vehicle for business.
A vehicle allowance paid on out-of-pocket expenses related to business use may be considered a taxable income, unless you are acting in the capacity of an employee and the allowance paid by the corporation equals the CRA’s prescribed per kilometre rate.
For 2023, the prescribed per kilometre rate is 68 cents on the first 5,000 kilometres and 62 cents over 5,000 kilometres.
The prescribed per kilometre rate allowance is tax deductible for the corporation and tax-free for the recipient. Therefore, the allowance is not considered a taxable benefit and is not subject to CPP, EI and income tax withholdings.
Since the per kilometre rate allowance represents reimbursement on actual expenses paid, the corporation cannot further reimburse the employee to qualify for the tax-free allowance.
Buying or leasing a car under the corporation can be an effective way to save taxes when filing a corporate tax return and reduce the financial burden of personally owning a vehicle. Both options have their advantages, but ultimately it is vital to consider the vehicle purchase price, interest charges, lease terms, and percentage of business use before making a decision. Also, you should compare the difference between regular gas vehicles and electric vehicles, as the incentives and available tax deductions can vary. If you need help deciding which option works best for you, our team of experts will be happy to advise.