Company Vs Personal Vehicle: Tax Strategy From KWB

Answer

Deciding between using a company vs personal vehicle for business purposes involves various tax implications that can significantly impact your bottom line. KWB highlights that understanding the nuances of these options is crucial for optimizing deductions and minimizing liabilities, whether through mileage claims or capital allowances on a company car. The best choice often depends on factors like annual mileage, vehicle cost, and individual tax circumstances.

Personal Vehicle Ownership: Tax Implications for Businesses

If you use your own vehicle for business purposes, a tax free allowance can be paid to you for business travel.  Under this method, all vehicle expenses are paid for personally and would include gas, repairs and maintenance, insurance, car washes etc.  The only vehicle related expense which should still be paid by the corporation is parking for business purposes. The simplest way to pay yourself is to pay an allowance based upon the rates provided by the Canada Revenue Agency (CRA) as shown in the chart below:

Personal Vehicle Use for Business: Tax Implications

When a vehicle is purchased or leased in a corporation, the company has the benefit of deducting capital cost allowance (depreciation) or lease payments along with the vehicle operating costs from their taxable income reducing the amount of corporate tax owing.  Typically vehicles purchased in the company are used by you as well, which results in a benefit to you that is either added to your T4 as an employee benefit or charged to your shareholder loan account.  The following factors need to be considered when purchasing or leasing a vehicle in the company:

1)      Determination of an automobile vs. a motor vehicle

CRA restricts the amount of costs that can be claimed for vehicles classified as automobiles to $800/month for leasing costs and to $30,000 plus GST for capital costs.  However, these limits do not apply to vehicles classified as motor vehicles.  To be classified as a motor vehicle, the vehicle is typically a truck, van, or SUV where 90% of the time the vehicle is used to transport goods and equipment for business purposes.  What is important to note is that this classification is determined in the year of purchase and any change in use subsequent to the year of purchase does not change the tax treatment of the vehicle.  There are other factors that may be applicable in determining the classification, so please contact us for clarification if you are unsure how your vehicle will be treated.

2)      Buy vs Lease 

When a vehicle is leased, the lease payments are deductible in the corporation.  When a vehicle is purchased the deductible expenses include the interest expense (if financed) and the capital cost allowance (depreciation).  The total deductions over the life of the vehicle tend to be close regardless of whether the vehicle was leased or purchased, therefore, the decision to lease or buy should be viewed as a financing decision as the inherent interest rates are more relevant than the annual income tax deductions. 

3)      Standby charge and Operating benefit 

A standby charge and operating cost benefit must be charged for any personal use when vehicle ownership is through the company. This amount is either added to your T4 as an employee benefit, or charged to your shareholder loan account.  It is important to note that the standby charge is calculated using the original cost of the vehicle, each and every year, regardless of how much it has been depreciated.

Standby charge:

If the automobile is used >50% for business the standby charge can be reduced by the following formula:

Operating benefit:

Note:  When the business use is greater than 90% of the total kilometers driven, the standby charge and operating benefit are insignificant.

Company-Owned Vehicles: Maximizing Corporate Tax Benefits

Typically, when a vehicle is driven greater than 90% of the time for business use, it is better to have vehicle ownership in the company, especially if it is a newer more expensive vehicle. The tax savings resulting from the automobile expenses that are deducted in the company will generally outweigh the tax on any personal benefit incurred.

When business use drops below 90% the standby charge and operating benefit taxable to the individual can become significant and over time may be greater than the deductions available to the corporation.  This is a result of the standby charge being calculated using the original cost of the vehicle, each and every year, regardless of how much it has been depreciated.

When looking at personal vehicle ownership, other factors that need to be considered are the tax consequences resulting from the need to take funds out of the corporation in order to purchase the vehicle.

Given the complexity and multiple factors involved in making the right decision, no simple answer can be given.  If you are thinking of buying a vehicle and would like to make the best decision for your situation, please feel free to call us at 780.466.6204, or click here to email us.

Thanks to Sophie Duncan of KWB Chartered Accountants for providing much of this content