If you use your vehicle for earning business income and have eligible travel expenses, you are probably already aware that you can deduct some of your vehicle costs. What you may not know, though, is the difference between leasing and financing a vehicle for tax purposes. If you’re considering adding a new vehicle to your business, here are some things to consider:
When leasing a vehicle, the limit on deductible lease cost is $800 per month, before HST. This means that if your lease cost is $950 per month, before HST, you’re restricted to claiming only $800 each month. However, the amount you can deduct for tax purposes is restricted further.
In the same example as above, if you use the vehicle 70% for business purposes during the year, and 30% for personal use, then the amount you can deduct is now just $560 per month, before HST – the rest of the cost is considered personal use and is not deductible for tax purposes. This limit is further ground down by a formula based on the list price of the vehicle. This formula is designed to prevent people from purchasing expensive luxury vehicles and deducting the full amount of the lease payments.
Financing a vehicle implies that you’ve taken out a loan to purchase the vehicle. You still have monthly payments, but you’re considered to own the vehicle. You’re eligible to deduct the interest on a financing loan, up to a maximum of $300, per month.
Again, like in our leasing cost example, this is further restricted based on your business use percentage of the vehicle each year. To calculate your business use of your vehicle, divide the number of kilometers driven for business purposes during the year by the total number of kilometers you drove in the year.
Since you own the vehicle, you’re also permitted to deduct Capital Cost Allowance (CCA). The rate of this deduction is 15% of the total purchase price in the year of the vehicle acquisition, and at a 30% declining balance rate each year thereafter. The amount of CCA that can be deducted is further restricted based on your business use percentage of the vehicle each year.
Another important consideration is that the total purchase price in the CCA calculation is often restricted on passenger vehicles to just $30,000, before HST. This means that if a passenger vehicle was financed for $42,000, before HST, you would only be able to claim the CCA deduction on the first $30,000 of the vehicle purchase price, assuming you’re registered for HST. If you are not registered for HST then the HST can be claimed as part of the purchase price. The Canada Revenue Agency views passenger vehicles in excess of $30,000 to be luxury vehicles and therefore restricts the deduction for tax purposes.
So… which option should you go with?
In general, as the cost of a vehicle and expected duration of ownership increases, it becomes more favorable (from a tax perspective) to lease rather than finance. While you’re limited to deducting $800 per month through the lease, this is often higher than the combination of CCA and interest that can be deducted under a financing scenario, especially as the cost of a passenger vehicle increases beyond the $30,000 luxury vehicle threshold. In addition, there will likely be a recapture of CCA added to income if you sell a financed vehicle within the first few years of ownership.
There are also non-tax considerations that are very important to consider such as;
- The total number of kilometers you drive in a year
- How long you plan to keep the vehicle
- How much can you afford on your monthly payments
In our experience, these non-tax considerations are often more important than the tax considerations in the taxpayer’s decision-making process on whether to lease or finance an automobile.
If you’re considering leasing or financing a vehicle for business purposes, please don’t hesitate to reach out to your accountant and business advisor at RLB. We can help you with running the numbers, as well as discussing the non-tax considerations, to ensure that you’re in the most advantageous position when purchasing a new vehicle.
Contact your local RLB Advisor today at 1-866-822-9992, or email firstname.lastname@example.org.
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