Should you buy or lease your business vehicle? Deciding whether to buy or lease a vehicle is a tough decision that business owners face. With many variables to consider, it is important to have all the facts when making this decision.
Self-employed individuals and business owners who opt to purchase or lease a vehicle through their company rather than using their own personal vehicle for business are eligible to deduct automobile expenses for tax purposes. If the vehicle is used both for personal and business use, the individual may have to recognize taxable income for the personal portion. However, the company is able to deduct expenses related to the vehicle's business use. Portion of this decision should be based on the tax benefits.
If you decide to purchase a vehicle, you are only eligible to claim a percentage of the vehicle's cost as capital cost allowance (CCA) each year, for example, depreciation. The first year you are entitled to claim 15% of the cost (half-year rule) and in subsequent years you can claim 30% of the remaining portion of the unamortized cost. The vehicle can belong to either CCA Class 10 or Class 10.1. The maximum capital cost of each vehicle that may be included in either CCA Class that you can capitalize and amortize is capped at $30,000 plus GST and PST. In the year of disposal of a class 10.1 vehicle, 15% CCA may be claimed.
If you have financed the purchase of the vehicle, you can deduct interest on money you borrow for a vehicle used to earn income. You are able to claim the interest costs, subject to an annual maximum amount, that is set out in the tax legislation. The annual maximum interest deduction is the lesser of the interest paid for the year and $10 multiplied by the number of days for which interest was payable in the year (i.e. a maximum of $3,650, unless it's a leap year!).
The other benefit to owning the vehicle is that if you are a GST registrant you may be able to claim some or all of the Input Tax Credits (ITC) when you purchase the vehicle.
Some people prefer to lease vehicles so that they can enjoy a new vehicle every couple of years. The maximum deduction allowed for monthly lease costs per passenger vehicle is $800 plus GST and any applicable PST. The deductible lease costs are prorated if the value of the vehicle exceeds the capital cost limit of $30,000. If you are a GST registrant, the GST included in the monthly lease payment can be claimed on that period's GST return as an ITC.
While one option may result in a higher tax deduction in the first year or two, the overall tax impact will usually be similar for either option.
When choosing between purchasing and leasing a vehicle for business, other factors to consider include:
- Mileage: Knowing how many kilometers on average you expect to put on the vehicle each year is important. Lease agreements often specify the number of kilometers that can be driven in a fiscal year, and can be accumulated over the term of the lease. In addition, there are penalties for excess kilometers driven. If you do a lot of commuting driving more than an average of 20,000 kilometers a year, then a lease may not be as cost-effective due to those penalty provisions.
- Affordability: How much do you want to spend on a monthly basis? Usually, lease costs are much lower than monthly payments on a car loan.
- Usage: Will the vehicle be purchased or leased by a company for use by an employee? When a vehicle is provided to an employee or a person related to the employee, the employee usually will be considered to have received two taxable benefits, which should be reported to tax authorities.
- Standby charge benefit (applies when an employee has access to the car for personal use).
- Operating cost benefit (applies when an employer pays operating costs that relate to personal use).
Additionally, it is important to note that if you are a GST registrant, the $30,000 limit also applies when calculating GST input tax credits on the purchase or lease of a vehicle.
Although, it may be tempting to buy or lease a luxury automobile, it is important to consider all the relevant factors, the overall cost of the vehicle and along with long terms and net of tax benefits that can be maximized.
For more information on automobile expenses and tax deductions, you can reference CPABC Tax Tips. If you have any questions about leasing or buying a vehicle for your business, consult with Sidhu & Associates chartered professional accountant.