Jun 9, 2011

If you are a business owner or an employee who needs a car for work, you should know whether it’s more tax efficient to lease or buy a car for a business in Canada. If your company provides you with a car check out these tax implication for that situation. There are several steps involved in answering the question, “Is it better to lease or buy a car for a business in Canada?”

## Step 1: Calculate the cost of the car including fees and HST

I phoned a local Toyota dealership in Toronto, Ontario, Canada and I asked, “How much does it cost to buy a Toyota Camry LE?” The total cost including Freight, PDI, other fees, and HST is \$34,910.

## Step 2: Calculate the Maximum Amount for Capital Cost Allowance

The second step when deciding to lease or buy a car for a business in Canada is to calculate the maximum amount of the cost of the car that you can depreciate for tax purposes. Depreciation (also known as capital cost allowance or CCA) for cars is 30% per year, and its tax deductible. The maximum cost of a car that is eligible for depreciation is \$30,000. Since the pre-tax cost of the Toyota of \$30,894 exceeds the \$30,000 limit, only \$30,000 will be eligible for depreciation.

## Step 3: Calculate Capital Cost Allowance Deductions

In step 3, the total capital cost allowance (CCA) deductions are calculated:

 Year UCC value Eligible CCA Amount (1) CCA Rate (2) CCA for the Year (1 x 2) 1 0 30000 * ½= \$15000 30% \$4,500 2 4,500 25,500 30% \$7650 3 12,150 17,850 30% \$5,355 4 17,505 12,495 30% \$3,749

• In year one, the CCA is equal to \$30,000 x 30 percent x ½ = \$4,500. The 50% reduction (also know as the ½ year rule) only applies in the year of acquisition of the car.
• In year two, the CCA is equal to \$30,000 minus \$4,500 (the depreciation claimed in the previous year) x 30% = \$7,650.
• In year three, the CCA is equal to \$30,000 minus \$12,150 (the depreciation claimed in the two previous years) x 30% = \$5,355.
• In year four, the CCA is equal to \$3,749.

The total CCA over four years is \$21,254. I’ve assumed that you are going to own the Toyota Camry LE for 4 years, but the analysis can easily be adjusted if you plan to own your vehicle for a longer period of time.

## Step 4: Calculate the Tax Saving

In step 4 of the buy analysis, calculate the tax savings from deducting the CCA (from step 3) on your personal tax return. I made the following assumptions:

• Your personal tax rate is 40%.
• The residual value of the car is \$11,898 (confirmed by Toyota Dealership). This means that after four years the car is worth \$11,898.
• You use the car 70 % of the time for business purposes.
• The total interest cost over the 4 years to finance the purchase is \$1,371 or 1.9% (confirmed by dealer).

When deciding to lease or buy a car for a business in Canada the tax savings related to buying can be calculated as follows:

\$21,254 (Total CCA deductions)

\$1,371 (Interest expense 4 years)

\$22,625

x 70% (Multiplied by business use)

\$15,838

x 40% (Tax rate of 40%)

\$6,335 Tax Savings

The total tax savings from buying a car is \$6,335.

## Step 5: Calculate the After-Tax Cost of the Car

Step 5 while contemplating a decision to lease or buy a car for a business in Canada is to calculate the after-tax cost of the car over the period of ownership.

\$34,910 (Cost of car (from step 1))

\$1,371 (Interest)

\$36,281

(\$11,898) (Less: residual value in year 4)

(\$6,355) (Less: tax savings (step 4))

\$18,048 or \$4,512 per year (After Tax Cost of Car)

In summary, the after tax cost to buy the Toyota Camry LE, is \$18,048 or \$4,512 per year. This concludes the buy analysis in answering the question, “Is it better to lease or buy a car for a business in Canada.”

### Leasing a Car – Tax Savings

The next part while completing leasing or buying a car for a business in Canada involves calculating the after-tax cost of the lease.

## Step 1: Calculate Cost of Lease

In Step 1, you must calculate the cost of a lease over the lease term. When I phoned the Toyota dealership, I was informed that the monthly lease payment including taxes is \$516, and the interest rate implicit in the lease is 2.9%. The maximum deduction permitted by the Canada Revenue Agency (CRA) for lease payments is \$800 per month plus taxes. Since the lease amount of \$516 per month for the Toyota is less than the maximum amount of \$800, plus taxes, the full amount of the Toyota lease is tax deductible. The total cost of the Toyota lease over 4 years is \$24,768 (\$516 x 48 payments).

## Step 2: Determine Tax Savings from Lease

Step 2 is to calculate the tax savings from deducting the lease payments on your personal tax return.

\$24,768 (Lease cost over 4 years)

\$17,338

x 40% (Your personal tax rate)

\$6,935 tax savings from lease

The tax savings from deducting the lease payments is \$6,935.

## Step 3: Calculate After Tax Cost of Lease

Step 3 when deciding to lease or buy a car for a business in Canada is to calculate the after-tax cost of the lease.

\$24,768 (Lease cost over 4 years)

\$6,935 (Less: tax savings)

\$17,833 after tax cost of lease

The after tax cost of the lease over 4 years is \$17,833, or \$4,458 per year.

## Step 4: Compare Cost of Buying Car to Cost of Leasing Car

The final step is to compare the after-tax cost per year from buying a car to the after-tax cost per year from leasing a car.

## Leasing is Cheaper!

The after-tax cost per year for buying a Toyota Camry LE is \$4,512. This is greater than the after-tax cost of leasing for \$4,458 per year. In this example it makes more sense to lease the car than buy. Each situation is different, so it’s important to complete the analysis each time when comparing whether to lease or buy a car for a business in Canada.

## Non-Tax Costs – Leasing

The other non-tax costs that you should take into consideration when leasing a car for work or for business purposes are:

• Once you return the leased car after the lease is finished, the car dealer will require that you perform certain repairs so that car is in a salable condition.
• Car dealers often limit the number of kilometers that you can drive on a lease. Extra kilometers over the limit are charged to you.
• Pride of ownership is greater when you buy your car and you will probably take better care a purchased vehicle.
• Cash-flow is another factor to consider. The monthly payments are almost always lower on a lease than they are when financing a car purchase  or an outright purchase.
• Finally, the interest rate implicit in the lease and the interest rate charged on a car purchase loan are very important to take into account.

## Stand By Charges

When deciding to lease or buy a car for a business in Canada you must account for standby charges. A standby charge is a benefit the employee receives when an automobile is provided by their employer and is available for personal and business use. The cost is calculated based on:

• Original purchase price or monthly lease cost on the car (Including all taxes)
• Number of months the car is made available to employee for personal use
• Number of KM for both business and personal use
• Any reimbursements by employee for availability of vehicle

To calculate the standby charge for your business we will use the examples we have discussed above and add in a few more details.

• To buy a Toyota Camry LE the cost is \$34,910
• To lease a Toyota Camry LE the monthly price would is \$516.
• The car will be made available to the employee for 1 year (12 months)
• The total kilometers driven in the year was 30,000, of which 10,000 kilometeres was for personal use.

The formula for calculating the standby charge when the automobile is owned by the employer is: 2% x cost of automobile x #months available to employee in the year

2% x \$34,910 x 12 = \$8,378

Stand by Charge for Leasing

The formula for calculating standby charge for a leased automobile by the employer is: 2/3 x monthly lease cost (excluding insurance) x # months available to employee in the year

2/3 x \$516 x 12 = \$4,128

In this case, it benefits the employee if the car was leased, because the standby charge is smaller for leased vehicle than a purchased vehicle. The standby charge is a taxable benefit that will be reported on your employment income slip (T4) and will increase your taxable income.

Standby Charge Reduction

You may be able to reduce your standby charge even further if the following conditions are met:

• 50% of the kilometers driven by the employee are attributed to business use
• Less than 20,004 km/year are driven for personal use

Since business use is more than 50% of our total kilometers driven (20,000/30,000) we now have a reduction to our standby charge calculations. The new standby charge for purchasing a car would be:

\$8,378 x (10,000/20,004) = \$4,188

And to Lease:

\$4,128 x (10,000/20,004) = \$2,064

By limiting an employee’s personal use kilometers to less than 50% of the total kilometers driven in the year, you can save yourself half of the taxable benefit from the standby charges.

## Operating Cost Benefit

When you are provided with a company leased or company owned vehicle, an operating cost benefit will be reported on your employment income slip (T4). This is on top of the standby charge discussed above.

Operating costs include:

• Gas and Oil changes
• Maintenance charges and repair expenses

There are two methods of calculating your operating cost benefit. The first is multiplying the personal use kilometers driven by the standard rate given by the CRA of \$0.27/km.

The second method is only available if at least 50% of kilometers driven by you were attributed to business use. To calculate the operating benefit under this method, you must multiply your standby charge amount by 50%. Which ever method results in a lower operating cost benefit can be added to income.

If we use the same details as the standby example, the operating cost benefit for buying or leasing a car would be as follows:

Buying a Car – Operating Cost Benefit

Lesser of:

1) 10,000 km x \$0.27 = \$2,700 Since 66.67% (20,000/30,000) of the kilometers driven were connected to business uses, we can calculate the operating cost benefit using our alternative method. 2) \$4,188 x 50% = \$2,094

Since (2) is lower than (1), the alternative method of calculating the operating cost benefit results in a lower taxable benefit to the employee. Therefore the total taxable benefit to the employee would be \$4,188 (standby charge) + \$2,094 (operating cost benefit) = \$6,282.

Leasing a Car – Operating Cost Benefit

Lesser of:

1) 10,000 km x 0.27 = \$2,700

2) \$2,064 x 50% = \$1,032 [Alternative Method]

Since (2) is lesser than (1), the alternative method results in a lower operating cost benefit. Therefore the total taxable benefit to the employee would be \$2,064 (standby charge) + \$1,032 (operating cost benefit) = \$3,096.

Tax Tip: If your employer is giving you a car for business use and your personal kilometers are less than 50%, make sure they reduce your operating cost benefit.

Tax Tip: The CRA has an online calculator that you can use to calculate the operating cost benefit and standby charge.

## Why Not to Place a Down Payment on a Lease

When leasing a car you may want to put a big down payment so your monthly payments are reduced. However this is not a good tax move as you may be chipping away at your lease deduction. As mentioned above the CRA permits a maximum monthly deduction of \$800 for leased vehicles. We have established that the monthly lease payment of a Toyota Camry LE is \$516 a month. If you were to put a \$5,000 down payment on the car the monthly payment would decrease to 436.67 (Financial calculator).

Although you have decreased your monthly payment you will not be able to deduct the down payment portion. After the monthly payment is subtracted from the 800 deductible limit you will only have \$363.33 (800 – 436.67) left to deduct. This portion can only be claimed in the first year you leased the car.

For a \$5,000 down payment the maximum portion you will be able to deduct (if you leased the car in January) is \$4360 (363.33 x12). That means that \$640 (5,000 – 4360) of the down-payment is non deductible.

If you must make a down payment on a lease make sure that you have enough excess deduction to cover the down payment in the first year of payment.

#### Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

##### Related Resources

1. Jim Nichols says:

Would there be an advantage to lease a car for personal use rather than buy???

1. superAmin says:

Hi Jim,

This article takes an in depth look at the pros and cons of buying vs leasing car for personal use.

Thanks,

Francis

2. brian says:

Yes in this scenario the total payments will be less in 4 years if you lease but if you own the car, you also get the bonus of the value of the car after 4 years minus the cost of manufacturer repairs within the 4 years.

3. Sid says:

Very in depth analysis on the decision to lease or buy a car. I’m deciding which method to choose myself

4. Katrina says:

Say I use my car only for business use would I be able to claim 100% of my car expense?

5. Ameen says:

I was wondering is it possible to have a capital gain on a car?

1. superAmin says:

Hi Ameen,

Car’s usually never increase in value as you drive them making capital gains highly unlikely. In certain circumstances such as old classic cars can be sold at a profit. In theses rare cases you must pay capital gains on the selling price minus the Adjusted cost base of the car.

Thanks

Allan

6. Michelle says:

I moved from Montreal to Edmonton Alberta this year. I wanted to know what vehicle expenses can i deduct due to the move. I drove myself and my husband with some of our furniture.

Thanks

1. superAmin says:

Yes Michelle you are entitled to a deduction. It can be calculate two different ways. First you must keep all receipts that attributed to your vehicle expense during the move. This would include all gas receipts and a receipt from a mechanic if your car has a mechanical issue. If you choose the second method, the CRA will allow you to deduct a rate based on kilometres you traveled. Use the rate in which your travel begun so in your case it will be Quebec. For more information on moving expenses you can deduct visit the CRA bulletin on Allowable moving expenses

7. Rachel says:

Hi Allan,

I receive a monthly car allowance from my employer. I was just inquiring whether or not this is considered income and should be included on my personal return.

Thanks

Rachel

1. superAmin says:

Hi Rachel,

An automobile allowance paid by your employer will be taxable> You must include this as income on your personal return, unless it is based on actual kilometers driven by the employee.

Thanks

Allan

1. Sam says:

Hi Allan,

Very informative article you have here and I appreciate all the details. I’m very new to the subject and just wanted some clarification for my current situation.

I am a transport truck driver in Windsor, ON who has to travel 40km-50km one way to pick up a work truck. I do NOT own the truck but have heard that you do not need to own a truck to be incorporated. So, my CA advised me to register a business number (1234578 ontario inc) and that would make me eligible to lease a vehicle and write off the expenses. Can you elaborate on that for me as I am not familiar with the rules

Kind regards

1. superAmin says:

Hi Sam,

I will explain the process for you. Once you become incorporated, you will be able to lease the vehicle using the corporation’s name. After which, you should get a lease document that shows your lease of the truck. This document will be useful in order to claim the vehicle lease expenses. It will be best for you to keep a log book for your travel expenses, and the kilometers you have driven, your other expenses for the vehicle might include gas, insurance, maintenance, and meal expenses during your work. At the corporate year end, you can provide the logbook and the documents to your accountant who will prepare your corporate tax return. We are always here to help, and will be happy to prepare your returns.

8. James says:

Hi there,

I recently purchased a car as a gift for my son. I was wondering if there was anywhere on my tax return where I could get some sort of deduction.

Thanks

1. superAmin says:

Hi James,

Unfortunately you cannot claim gifts unless they are made to a registered charity.

Thanks

9. Alfred says:

Allan, the explanation was very good. But I still have questions on my situation because I will be real estate sales representative. Car is my essential tool to meet clients and Honda Odyseey is I looking. Let say only 50% will use in business and price including tax is about \$54,386.34. leasing is \$789.60/month in 4yrs terms and financing is \$743.77/mo for 7 years. Which is the right for me. Thank you very much!

1. superAmin says:

Hi Alfred,

The cost of leasing will be more expensive over a 4 year term by about \$7,000 extra. I determined this figure using the buy vs. lease calculator on my website – see http://madanca.com/buy-vs-lease-canadian/

Thanks,

Tel: 905-268-0150

10. Alfred says:

Thank you very much! I figured out buying may be is my better option as I watch your video and do the math in 7 yrs financing with depreciation, end up is approximate \$1000 different. Once again, thank you and have a wonderful day.

1. superAmin says:

Thank you for the feedback.

Allan

11. David says:

Hi Allan,
Great explanation!
I have a couple questions. If you were to buy a car that costs lets say \$100,000.00

What would the Eligible CCA amount be for Years 2,3,4? Would Year 2 be the same as the above 30k example? Or would Year 2 be \$100k-(\$100k / 2 * 0.3)?

Also is there a limit on the HST that can be claimed? For example with \$100k there would be \$13k HST in Ontario. Would I be able to claim all of that? Or am I limited to \$3.9k (13% of 30k)?

Thanks
David

1. superAmin says:

Hi David,

The maximum purchase price eligible for capital cost allowance on vehicles is \$30,000 (plus sales tax, if not recovered). Therefore, in your example with the \$100,000 car, CCA would be calculated at a rate of 30% per year (on a declining balance scale) on \$30,000.

In year 1, the CCA claimed would be \$4,500 (\$30,000 x 30% x 1/2) due to the half year rule. In year 2, the CCA claimed would be \$7,650 ([\$30,000 – \$4,500) x 30%).

The maximum ITC (input tax credit) that can be claimed is \$3,900 (\$30,000 x 13%).

Thanks,

Tel: 905-268-0150

12. Trinity says:

If I received a referral check from a dealership must i report it as income on this years tax return?

13. Leo Dizon says:

If the price of leased vehicle is \$50000 and the monhtly lease amount is \$800 does it mean that the tax deductible amount is less tthan \$800 or I can claim the maximum amount of\$800.

1. superAmin says:

Hi Leo,

That’s a good question. If the list price is more than \$40,000, then the deductible monthly lease amount (even if less than \$800 per month) is reduced by a formula. This is to prevent taxpayer abuse where taxpayers lease luxury vehicles and make a hefty down payment to reduce the monthly lease payment to below \$800 / month.

Thanks,

Tel: 905-268-0150

1. kevin desouza says:

Is the list price the MSRP, or the final cost you negotiate the dealer down to upon lease/purchase?

1. superAmin says:

When evaluating whether it’s better to lease or buy, use the final sales price (before taxes) that you agreed to pay to the dealer.

14. MirelaM says:

Your example of the Toyota Camry LE didn’t show much of a difference in final cost when comparing buying and leasing (a little bit more than a \$100 difference between the prices). What’s your own personal opinion on whether or not a person should buy or lease a car? To me, it would seem that if the cost is relatively the same, then buying would be the best route to go since you can worry about condition on at your own time. Leasing seems to be more of a hassle in the long run, since the condition plays a bigger role.

The buy or lease option discussed is solely for tax and accounting purposes. But as you mentioned the buying option gives more flexibility compared to the leasing option. All the benefits including quantitative and qualitative should be considered before any decision is made.

1. kevin desouza says:

But you would have to sell the car after the 4 years because the majority of the allowed CCA deduction occurs in the earlier years.. The difference would begin to grow if you kept that same Toyota for 12 years, and had 3 different leases in that time… Compared to when the 4 year lease is up, you would probably get a new lease at around 4-500 a month and you can begin to be able to deduct the full amount all over again.

Am I correct in my thinking Allan? Thanks

1. superAmin says:

Your explanation is correct. But, you have to compare ‘apples to apples’, when evaluating whether it’s better to lease or buy. As a result, you have to use the same period of ownership / length of lease.

15. bryansuharly says:

Hi

I am thinking of buying a car for my job. I am a self-employed consultant with a steady client, but am not sure if I should finance or lease. What percentage of the vehicle (including parking spot, maintenance, and gas) is tax deductible?

1. superAmin says:

Hello Bryan.

If you buy a vehicle that is used for both personal and business, you will need to track your business travel. What you claim depends on the percentage you use for business. If you finance, you can claim the percentage of interest, depreciation, maintenance, license, etc. Lease payments are eligible to be fully deducted if the car is 100% for business. Otherwise, the percentage used for business can be applied.

Ultimately, whether you choose to lease or buy depends on you. Go through some of the calculations in the article to see which is right for you. Whichever you choose, be sure to keep an accurate log book and proof of all payments should you get audited. If you require further assistance, don’t hesitate to contact me.

Regards,

16. Fernando says:

I am self-employed and have a vehicle that I use for business. I am fairly sure that it is used for this purpose more than 50% of the time so I was hoping to get the Standby Charge Reduction. How would I go about verifying that the car is used for business more than 50% of the time? You mentioned tracking kilometre usage but I was wondering if there were any more requirements

1. superAmin says:

The Income Tax Act and Excise Tax Act do not have specific documentation requirements for recording the use of a vehicle. The only general rule is that you must keep records so that one could objectively determine the appropriate tax payable. Although if the vehicle is being used extensively, you may want to take more thorough records to prove that the car is being used for business. Consider compiling a logbook that indicates each business trip that was made, where you travelled to and from, and the distance travelled. As well you may want to track personal usage of the car to further prove you are using it accordingly.

17. bryfie says:

Hello Allan,

I am a small business owner in Hamilton, Ontario. I am thinking of buying a vehicle to be used exclusively for my business. Is there anything that is deductible, such as depreciation? Are there any disadvantages?

1. superAmin says:

Hello.

Depreciation, and interest on money you borrow for the car purchase, are both deductible. For cars, depreciation is 30% a year on a declining balance. Only a maximum of \$30,000 is accepted as the capital cost of the vehicle. The interest on money you borrow for the car purchase is also deductible. This is to a maximum of \$300 a month.

As with all CCA deductions, you cannot deduct the full cost immediately. Besides the limitations stated above, you must pay for your own repair and maintenance expenses.

Regards,

18. Steve says:

Hi Allan,

Thanks for the post with valuable knowledge and information.
I run my one-man training business in GTA and plan to lease a car of \$55,000 for 4 years, with monthly payment just below \$800 before HST.

I thought ALL expenses related to this car will be claimed under business, from your post here, I guess I was wrong.

My questions are:

How do I determine the business use %? do I need to prove that? Do I need to provide any documentation for that?

If I say 80% for business, does it means 80% of all the expenses related to this car can be claimed under the business? (leasing, insurance, gas, maintenance…)

Do I have to calculate the 20% of the expenses and reported on my personal income? I’m not paying myself a salary (will pay dividend), so my business does not have a payroll account at CRA. If I have to report the 20% as personal income, does this mean I have to create a payroll account?

I’m not understanding what the Standby Charge is for from this article. In my case, do I have anything to do with the standby charges? Is it necessary for me to understand that for my planned car leasing?

Is it possible you can write/share a post about accounting and tax implication of leasing vehicle for small business, and list things need to be considered from both business and personal perspective?

I wish to understand the impact on my business accounting/tax and personal tax. Thank you very much.

Hi Steve,

I apologize for the delay in our response to your comment on our post. Unfortunately not all vehicle expenses can be claimed by the business. To determine your business use percentage you need to keep a log book of business millage vs personal millage. Say you travel 20,000 km during the year and 15,000 was related to business use. Then you can claim 75% of your car expenses on your business tax return. You will need to keep a log book of each business trip taken in case of a CRA audit.

Types of expenses you can deduct include:

fuel (gasoline, propane, oil);
maintenance and repairs;
insurance;
licence and registration fees;
capital cost allowances:
eligible interest you paid on a loan used to buy the motor vehicle; and
eligible leasing costs.
Unfortunately you cannot deduct the remaining car expenses off your personal tax return. Only the business is able to deduct the expenses. You do not need to create a payroll account for this.

Standby by charges are only applicable if the business owns the car. When an employee uses the car it is seen as a benefit and must be included in the employees income as a taxable benefit.

To sum up only your business can claim car expenses whether its on a T2 corporate tax return or the T2125 of your personal income tax return. When claiming expenses you must separate personal and business use. You can claim only the business use percentage on your car expenses for the year.

thanks

Hello,

I am thinking of taking a job repairing ATM’s and laptops for a company. They will provide me with a Jeep Patriot to drive to sites, and pay for my gas. They would also pay for the vehicle’s maintenance. What are the tax implications of this situation?

1. superAmin says:

Hello,

If your employer provides you with a company car, a taxable benefit will be included on your T4. This is made up of two parts. The first is a standby charge, based on a percentage of the original cost or the monthly lease payments for the car. The second part only applies if your employer pays the vehicle’s operating expenses. This benefit is equal to 27¢ per personal kilometre driven and applies unless all amounts paid for personal operating expenses are reimbursed to the employer by February 14.

These are reduced by the amounts you pay to your employer. For a standby charge reduction, your payment must be made in the previous year. For an operating benefit reduction, your payment must be made by February 14.

Regards,

20. Ernie says:

Hello,

I am an independent contract that delivers take-out food. I have been recording the mileage on my car throughout the year. I am wondering if there is a way to claim the vehicle costs as a per-kilometer amount. I currently total every single vehicle cost, and then I apply the proper ratios.

Also, if I am missing receipts can I claim gas expenses? I have bank statements showing vendor name, purchase amount, and the date of purchase. If I cannot, how likely is this to trigger an audit?

1. superAmin says:

Hello.

This model only exists for employees. There is no per-kilometer rate for self-employed people. Missing a few receipts is most likely okay, as long as a relatively small portion of your expenses are accounted for in this way. Typically, the CRA would do a “spot audit”. This would involve examining some receipts, or examining your overall records. As a self-employed person, your likelihood of review is higher. However, it is impossible to say what this is. Here are some links that may help you. For employees: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/tmbl/llwnc/rts-eng.html. For self-employed people: http://www.cra-arc.gc.ca/E/pub/tp/it521r/it521r-e.html#P100_7334.

Regards,

Hi, I own a medium sized business in Mississauga. I was wondering if it is smart to get my company to reimburse my business related car expenses.

1. superAmin says:

Hello, it may be more beneficial if you pay for the car expenses and deduct them from your employment income on your personal tax return. This approach may be the best way to go because personal tax rates are usually higher than corporate tax rates. This makes the deduction more valuable to you personally than it is to your company.

22. Tim Hanfeld says:

I run a small cake and confectionery shop in Ontario. My business is becoming quite successful, and I would like to buy a small delivery vehicle. I will be financing it, over a period of a couple years. I have a couple questions. Can I use the vehicle as security to borrow money? How much of the vehicle can I capitalize and depreciate? Are there any other benefits or disadvantages?

1. superAmin says:

Hello.

You can indeed use the vehicle as security to borrow money. Also, by buying you are building up potential equity in the vehicle. This is the value of the vehicle, minus the debt you have paid off. However, be aware of the cost when you’re considering a vehicle. You can only capitalize and depreciate the first \$30,000 plus taxes. Therefore, choose a vehicle that’s less than that. Also, only a maximum of \$300 per month for interest is accepted by Revenue Canada for deduction.

Regards,

23. Claude Landon says:

Hello, I recently leased an electric car for my business located in Quebec. I was wondering if I could claim anything on my taxes for this purchase.

1. superAmin says:

Hi Claude, in 2009, Quebec made a few tax changes. They included a ‘Green vehicle tax credit.’ You can now claim a tax credit of up to \$8,000 for acquiring or leasing a green vehicle after 2008 and before 2016.

Allan and his team

24. Trainor says:

Hello. I’m thinking of leasing a car for my business. Are there any disadvantages besides the ones you have mentioned? How does residual value play into it? Finally, is there anything else I should consider?

1. superAmin says:

Hello.

Another downside is that you essentially pay for the most expensive years of the vehicle’s life instead of the dealer. The amount that you’re leasing for is the difference between how much you buy it and the salvage (or residual value) that is the predetermined value of the car at the end of the lease period.
When you lease, consider a vehicle that best retains its value. Rethink cars with a high depreciation rate. Many unscrupulous dealers try to shift more of the depreciation cost onto you, by embedding an unfairly low residual value.

When entering an agreement, read it thoroughly. Be wary of any clauses in the contract that call for additional charges for “excess wear and tear”, or above average costs for additional mileage. You want to minimize any surprise costs as much as possible.

Regards,

25. Victoria Bernard says:

Hi, the business I work for is offering me a company car. I am excited that they trust me enough to offer me a car, but I have a feeling that this may be too good to be true. Should I accept the car or is there a financial catch that I am not aware of?

1. superAmin says:

Hello Victoria, more often than not receiving a company car will end up hurting you on your tax return. The tax man will require you to include a “standby charge benefit” in your taxable income.

If you have a company car at your disposal, a taxable benefit called a standby charge will be added to your income and reported on your T4 slip. This is taxed because the government figures that there will be some personal benefit from using the company car. The standby charge is calculated as 2 percent of the original cost of the car for each month that you have the car. That means the charge will be 24% of the original price of the car each year.

However, you can reduce the taxable standby charge if two conditions are met. First, your business use must account for 50% or more of the total kilometres driven. Unfortunately, you cannot use kilometres used from going back and forth from your home and office as business kilometres. Second, your personal use of the car must be less than 1,667 km per month in the year.

You will also have to pay a 5 percent GST and 13 percent HST for the standby charge.

Allan and his team

26. anitaa says:

I just incorporated my business. Though it does not currently generate revenue, it will soon. I leased a vehicle mostly for business under my name. I plan on writing off most of the cost of the car and all associated ones from the corporation’s revenue. Does it matter that the car and insurance are under my name?

1. superAmin says:

Hello,

Normally, the reason to lease in your personal name is that the company is new. Many leasing companies will not lease to a new company because they are not sure of them. Therefore, many leases are put through as business expenses. This is a relatively common practice, as there are few alternatives to getting a lease.

Regards,

27. Kyle Elliot says:

Hi, quick question! I run a small company and one of the benefits to my employees include paying an allowance for gas based on kilometres. Am I allowed to deduct these on my taxes?

1. superAmin says:

Hello, yes you may if certain requirements are met. If the allowance is based off business related kilometres, the rate per kilometre is reasonable and you did not reimburse the employee for expenses related to the same use of the vehicle. If these requirements are met, you will be able to deduct 54 cents for the first 5,000 kilometres driven then 48 cents per kilometre after that.

28. Cindy says:

Hello,

My husband is going to buy a new truck, and contract it out to his current employer. Should he just get paid the amount the employer pays him per hour for the truck on his pay cheque? Or, should my husband set up a business and contract his truck and invoice the employer later? He would not be contracting himself; he is still an employee. Which of these ways is better? Also, can he get tax deductions for vehicle use even if he doesn’t set it up as a separate business?

1. superAmin says:

Hello,

I do not recommend running everything through your husband’s pay cheque. This is because employees are not permitted to claim depreciation on a truck. You do not need to register a business, but your husband should invoice his employer separately for the truck rental. Also, make sure he reports related income and expenses (this includes depreciation on the truck) on his tax return. If the annual rent is expected to exceed \$30,000, your husband will be required to register for the GST/HST and collect GST/HST on the rent. If you would like to speak more, I would be happy to discuss the matter with you.

Regards,

29. May says:

Hi Allan,

My fiance is running a construction business and we recently bought a truck for his business under my name and my mom’s name (co ownner) Can he still claim it under his business.

May

1. superAmin says:

Hi May,

Because your fiancee does not own the truck, they he is not able to claim depreciation for the truck. If the truck is used for business purposes however, he can claim the business-use portion of the operating costs of the truck that he pays for (gas, repairs, insurance, toll charges). The business-use portion is established by keeping a mileage log recording business and personal use.

30. Alberta Bookkeeper says:

I think that we should apply the same strategy in other states, too! For sure we will see improvements!

31. Racheal says:

Hi Allan, I am self-employed and am looking to purchase a car that I will use for personal and business use. Am I allowed to deduct any expenses from the car that I use for business?

1. superAmin says:

Hello Racheal, you will only be able to deduct operating expenses, you cannot claim expenses calculated on a cents-per-kilometre. To claim the operating expenses, you must keep an automobile logbook that supports your motor vehicle expenses. You must submit the logbook with the following conditions met:
• A full logbook for a 12-month base period is maintained
• A sample logbook for a continuous three-month period in each subsequent year is completed
• The business use in the sample logbook is within 10% of the results for the same three-month period in the base year
• The calculated annual business use as extrapolated from the subsequent sample log within 10% of the base-year result
If the calculated annual business use in a subsequent year exceeds 10% threshold, the base year will no longer be appropriate, and the sample period logbook will be reliable only for the three-month period that it had been maintained.

32. George says:

Hello Allan, I run a small business in Montreal and am looking to buying a car for the company. I also know it may be beneficial to lease the car instead of buying it. Could you give me the insights on if buying or leasing the car would be more beneficial?

1. superAmin says:

Hi, from a tax standpoint, leasing a car for your company can bring you a lot of deductions. The limit on the monthly lease payment that you can deduct is \$800 per month. At the end of the year, that will equal to a maximum of \$9,600 of expense that is tax deductible.

On the other hand, the limit for deductibility for a purchased vehicle is \$30,000. However, this amount cannot be deducted in its entirety but must be depreciated at 30% on a declining balance basis. You can also only deduct 50% of the depreciation in the year of purchase. This equals to a \$4,500 in year 1. In year 2, the depreciation expense is 30% of the undepreciated balance, which would be \$7,650. You’re also be allowed to deduct any interest paid on financing the vehicle. The interest rate can usually be found in the financing contract and calculated over the period of financing. The maximum amount of interest that can be deducted is \$300 per month.

Keep in mind that all repairs and maintenance, insurance, registration and other operating expenses may be deducted for both lease and purchase. However, only the percentage that you use for business can be deducted.

33. Bryan says:

Hi, I have a car that is owned by my company. I don’t use it that much for personal use and I am tired of paying so much for standby charges. Is there any way to reduce my standby charge without changing the structure of the car payments?

1. superAmin says:

Hello Bryan, one way to reduce the standby charge is to calculate your operating expense taxable benefit using the 24 cents per personal kilometre method rather than the method of just taking 50% of the standby charge. This means that you have to keep track of your business and personal kilometres, but it may save you tax dollars over the long run.

Another way to reduce your standby charge is to keep track of when the vehicle is not available for your use. For example, keep track of when you’re out of town and you don’t have access to your car. If you take another family vehicle on vacations, exclude that time in the calculation of standby charge.

34. Ayesha says:

HI Allan, I was planning on buying or leasing a van that I could transform into a service vehicle. I was just wondering if buying or leasing the van would be better for me in the long run.

1. superAmin says:

Hi Ayesha, in your case, buying the van may be more beneficial to you. The primary reason to purchase a vehicle instead of leasing is if you plan on keeping it for at least five years. After five years the financial advantages of leasing tends to decrease.

Buying a car can also allow you to customize the vehicle (in your case, make it into a service vehicle) as freely as you want. You can use it as much as you want, most leases only allow 12,000 to 15,000 miles per year. There are tax advantages for eco-friendly vehicles. Please note that not all hybrids qualify for the tax advantage, but programs can change or be phased out, so stay up to date on current requirements and tax breaks.

35. Kelly says:

Hi there, i am self employed with my own survey bussiness, I use my truck for every single job as I am always on the road, I just bought a new truck can i claim the HST i paid on it towards my hst collected this year, also do i claim 30% depreciation every year on a declining basis on my truck and if i keep it for 6 or 7 years do i just keep doing that until there is nothing left?. I traded my old truck in and received \$8000 but paid 40,000 for new truck. Do i need to track mileage when its used for work only.
Thanks Kelly

1. superAmin says:

Hello Kelly,

The answer is yes, you can claim-back the HST paid on the purchase of your truck on your HST return, so long as your business is registered for HST. The The HST paid is deducted from any HST collected during the year on the HST return. Note: For ‘passenger vehicles’ purchased, the maximum HST that you can claim-back is \$3,900. There is no maximum limit for work trucks.

For tax purposes, the 30% Capital Cost Allowance (CCA) is calculated based on the opening balance of the vehicle’s un-depreciated capital cost (UCC) every year. Overtime, the UCC of the vehicle will come very close to \$0. In the year of purchase, only 15% of CCA can be claimed on the cost of the vehicle.

Note: Cash back (or credit) that you received on the trade-in of your old truck, will be deducted from the purchase price of your new truck when calculating CCA each year.

You must maintain a vehicle log at all times to track your kilometers driven for business purposes.

Best Regards,

36. Shari says:

Hi Allan, which is best Leasing of Buying? just stating a new business I need the van to make pick up and deliver products, I don’t know how much Km I may used for the year as yet. . Looking at a grand caravan not sure how reliable it is so unsure if I keep it.
Also should I sign the vehicle under the business name I have not started or generate any cash flow yet. is it best to claim the vehicle under the business name or my name? for tax advantage . thanks, you seem so knowledgeable!!!

1. superAmin says:

Hi Shari,

I cannot answer your first question regarding lease or purchase. It truly depends on the number of years you plan on using the vehicle for, and how long you plan to keep your business open. The normal lease period is three years, and you have the option of purchasing the vehicle after the lease period. However, in hindsight, you will be paying more if you were to lease the vehicle and buy it after than to buy the vehicle upfront.

Regardless of whether the company buys the vehicle, or you buy it under your own name, the vehicle will need to be insured under commercial vehicle insurance. You cannot use your personal auto insurance to cover for this because you are in the business of transporting goods.

In terms of whether you want to claim the vehicle under the business name or personal name, I have to say it also depends on your long term plan and the usage. If you mainly use the vehicle for business purposes only, then it may be more convenient to have the vehicle under the company’s name. However, from a planning perspective, if you want to continue using the vehicle after closing the company, you can keep it under your own name.

From a tax perspective, as long as your company is not incorporated, you will be reporting your business income and expenses associated with the business in your personal tax return.

Best Regards,

37. Chris says:

Question I currently own a 2014 CRV and will be starting up a small business doing delivery. My CCA would be \$30K. I own the vehicle outright and make no monthly payments therefore the interest component of buying via loan vs leasing doesn’t necessarily apply to me. I was toying with the idea of selling it and leasing a smaller vehicle, but I will likely take a bit of a hit on the initial taxes I paid for my CRV in Dec 2013, which I’m guessing will in no way be deductible now. I’m unclear on when the “first year” rule for depreciation applies, given I just passed my first anniversary of ownership, and how that applies to how much depreciation I’d be able to claim for, say, my 2015 business year. When I try to follow the calculations in the models above, which are pretty close to my situation, I really can’t see that leasing is in any way a tax savings for me. I think the difference *might be a couple hundred bucks over the entire 4 years. Given the fact that if I leased I would probably exceed my km allowance by at least 12,000 km per year, it might actually end up costing me more to lease! What do you think?

38. Rob says:

Hi Allan,
Some interesting dialogue! I have a truck GMC Sierra (2010) fully paid for that I own and I started my own maintenance business in 2014. I was curious would it be beneficial for me to trade it in and apply it’s value towards a lower lease payment and gain a better tax advantage through a lease? Look forward to your response and thank you for your time.

1. superAmin says:

Hello Rob,

To answer your question above, if you lease the truck for business purposes, then you can deduct the lease payments from taxes. You are able to deduct the monthly lease payments so long as they do not exceed the \$800+HST per month limit. However, the initial down payment is non-deductible. You had mentioned trading in the truck and applying it’s value towards lower lease payments. A lower lease payment usually means a higher down payment. This would be of a lesser benefit to you from a tax point of view as the down payment is not deductible in your taxes, as stated above. The best option for you in this situation would be to sell the vehicle and use the money from the sale to pay for future lease payments as they happen to gain a better tax advantage.

Regards,

39. Eric says:

Hi there, I was looking at your information on deductions for small business and was wondering, where do car rentals fit in. If you don’t own a vehicle but occasionally rent one for work, not travel but daily use, how do you claim that as an expense?

1. superAmin says:

?You can claim car rental expenses related to business travel as a “Travel Expense”, which is fully tax deductible.

40. Sean says:

Hi Allan, I was thinking of buying a car for use in my business. The problem is that I barely have enough money to buy the car I want. If I do buy it, it would cut into my profits, which I don’t think I can handle at this point in time. Would it be better to lease the car instead? Any information would be great!

1. superAmin says:

Hi Sean, buying or leasing a car for business purposes ultimately depends on the kilometres you are planning to drive. If you are going to drive the car a lot, owning the car would be a better option because you will not have to worry about the maximum allotted mileage from a lease. Also, if you take out a loan to buy the car for business purposes, any interest on that loan can be deducted within the prescribed limits set by the CRA. (The limit is \$10 per day)

If you will not be using the car that often then leasing might be the better option. Leasing usually means lower monthly payments over the years that the lease is for. You can also deduct lease payments if you are using the car for business purposes.

41. Carol says:

Nowhere can I find how to: buy a new vehicle just before year end, take the half-yr. deduction cca and what to do with the “old” car….when there is no proceeds of disposition..do I just not record that car at all? If I put 0 for proceeds then it will 0 out the remaining UCC but it will still take CCA. You can only take CCA on 1 vehicle?

1. superAmin says:

If there are no proceeds of disposition, then do not record anything in respect of the old car on your tax return. DO NOT close the CCA class for the vehicle.

Add the cost of the new car to the existing CCA class that you were using for the old vehicle. The tax preparation software should automatically apply the half year rule when calculating the depreciation for the new vehicle.

1. Anton says:

I am self employed and planning on getting a new vehicle with a list price of \$50,000. I am considering leasing for 48 months. I was planning on making a down payment of \$7000 to reduce the monthly payments to about \$500. The \$7000 down payment is coming from a CIBC Drivers Edge Reward card that I accumulated over the last 5 years. After reading your comment regarding down payments on a leased vehicle, am I better off buying the vehicle.

42. Richard says:

Hi Allan

I’m a bit confused re leasing.
You mentioned that a formula is applied if the value of the car is greater than \$40k….

In my case, car is 52k and lease payments are over \$800. My business use is about 70%.

Would I not just write off \$9600/yr x 70%?

43. Nem says:

Hello Allan,

Your lease model vs purchase model for a vehicle in respect to self-employed tax expenses is excellent! I have two questions:

1. Does the purchase model example apply to situations where the car is bought out-right in one payment or does it also apply when financing the vehicle over time?

2. I thought the “UCC start” for the first year of purchase was \$30,000 which would also be your CCA: UCC? Regardless, would the max CCA claimed be \$7200 based on a 20% personal use rate? This would leave \$22,800 for your “UCC end”?

1. superAmin says:

Hi Nem,

The lease model vs purchase model presents how costs are broken-down to arrive at your potential tax savings. When the vehicle is purchased out-right, your method to simplified the vehicle would only be deducted at the maximum allowable for CCA. In addition, your percentage for business use is factored in. However, purchasing the vehicle through financing or leasing and deducting the cost overtime may provide greater benefits than directly depreciating the cost of the vehicle at 30% for business use.

44. Nem says:

Hello Allan,

I figured out the answer to my second question. I took a look at your “Tax Write-Offs for a Small Business in Canada” article. The chart explained it.

I am still not sure if all this applies through financing a vehicle over time? The first year addition would still be the cost of the car or a maximum of 30,000?

45. Ioanna says:

Hi Allan,
I want to get this right so that I know what to keep track of when doing my 2015 taxes.
I did not know that I could claim business driving as an expense since I am self employed and only working at one client’s place after having talked to one of your staff.

But anyways, do you have any books/ebooks or guidlines that I can use to keep track of my business kilometer driving for business purposes if I am self employed?
Also, is there any information on what types of trips in my car qualifies as business kilometers, so I know what to keep track of and what to exclude (so I know not to mix in personal driving)?

1. superAmin says:

Hi Ioanna,

1. Date
2. Kilometers driven
3. Purpose
4. Location

The following vehicle costs can be claimed:

1. Depreciation
2. Gas
3. Repairs
4. Insurance
5. Parking
6. Toll charges
7. Registration fees

Thanks,

46. Matt says:

Hi Allan,

I currently work in sales and use my 2012 hyundai elentra 100% for work. This vehicle is completely paid off.

In terms of deductions, would it be wise to sell my vehicle and lease instead? I am currently wrestling with the thought of increasing my expenses to lower my tax rate.

1. superAmin says:

Hello Matt,

The answer to your question on whether you should sell your vehicle and lease instead truly depends on the number of years you had the vehicle, the purchase price, and the cost for the lease and interest.
First of all, paying off your vehicle will not impact the way we calculated the deductions for tax purposes. In tax, we use Capital Cost Allowance (CCA) to calculate the deductible amount. CCA works similarly to declining balance method of depreciation, at a fixed rate of 30%, with the first year of purchase being half of fixed rate.

If you have had the vehicle for many years, then it’s possible that the deductible amount is less than your lease price. However, because you have bought the vehicle less than four years ago, it is possible that your deductible amount is still greater than the potential lease cost.

47. edy says:

Excellent article. I leased for 4 years a car of under \$40,000… I paid \$20,000 already in monthly payments (\$440 x 48) and now wish to buy the car as it is low mileage and good condition. I will buy for about \$18,000 after taxes. I can depreciate about 30% per year under my business, or \$6500.

One thing you miss in the calculations is if you have a car that is in good condition and maintained, in the long run you save as you don’t have an added expense for always leasing a new vehicle. The tax savings may be better leasing but you also have greater expenses, compared to when you finally own the vehicle you may not get any additional tax write off but at the same time you don’t have an expense. Does it not make sense in the long run to own the car if it runs well?

1. superAmin says:

Hi Edy,

There are many advantages to both leasing and buying and each situation is different. As well, there are many disadvantages.

Leasing:

• The monthly lease payments are usually lower than loan payments. Also the vehicle will depreciate in value.
• The future value doesn’t affect you financially but you also have no equity in the vehicle.
• You can deduct the monthly payments up to a maximum of \$800 per month as well as the interest up to a maximum of \$300 per month.

• The cash value is yours to use as you like.
• If you are buying, you will not be able to deduct the loan amount.
• In general, a car is usually good for about 5 years, which is typically the lease time as well. After that, there may be repairs that may need to be done which is not typically deductible when you buy a vehicle.

In general, the option of leasing or buying is a personal preference and depends on what one is looking for.

48. Joe says:

hey i was just wonder what would be better for me to due … Lease or finance ? I am self employed i have a small delivery business and i was thinking about getting into a new truck worth around \$70,000 … The lease over 60 months is around 1150 a month at 8% interest rate and if i finance for 72 months my payment is around 950 at a 2.9% interest rate with 0 downpayment .the truck will be used for work only

49. David says:

Great article, it’s been very useful in our decision to buy vs. lease (my wife is self employed, we’d be writing off the vehicle against her income). I think it’s important to point out that in the examples above it’s understood that you would be getting rid of the car after 4 years in both cases, either because the lease is up, or you are selling the car. Otherwise, if you are going to keep the car after the the purchase financing term is up, then the residual value of the car shouldn’t be taken into account in the after-tax cost calculation. Also in this case, assuming you are claiming CCA for all the years the car is owned, you get very close to that 30k CCA limit. This will have a minor impact on the after-tax cost.

Questions: is my assumption above correct, or have I missed something? This may not be the right forumn, but I’ve been having trouble finding an answer to 2 questions about purchasing/leasing a new vehicle for self-employed business usage, perhaps you have an answer. My wife is self-employed, but we file our taxes together as one household. Does it matter whose name the new vehicle is purchased under if the plan is to write off the expenses against her business income? Likewise for the car insurance – does it need to be in her (or her business) name, or can it be under my name? (depending on who has cheaper insurance rates).

Thanks again for a great article.

1. superAmin says:

Hi David,

Yes, if you plan to keep the car indefinitely after purchasing it, there would be no residual value and the tax savings from claiming CCA will decrease over the years. To compare the two alternatives, equal terms must be used to determine the after-tax cost of the car, in this case, 4 years. Leases typically last 4-5 years and at the end of it, you return your car back to the dealer. Buying on the other hand, leaves you with an asset worth money which is accounted for even if you plan to keep it.

To answer your next couple questions, it’s better if the car is registered to your wife and your wife is the one who is the insured, as she runs the business. This way, she can deduct the car related costs from her business income. CCA can also be claimed to the extent of business use of the vehicle.

Best Regards,

50. saju says:

i am a self employee and i am planning to lease or buy a car cost more than 60000 dollar and the lease amount per month is 800 so can you please tell me i can deduct all this 800 [800*12 equal 9600 per yer ] for my expense. plus gas and insurance . or it better buy a car

1. superAmin says:

Dear Saju,

The Income tax act has two classes for vehicles-Class 10 and class 10.1
Your vehicle qualifies for class 10.1 as it is a passenger vehicle that costs more than \$ 30,000. Under the Income tax act you can get a deduction for lease payments to a maximum of \$ 800.00 plus HST. You can also claim all the expenses related to the vehicle, including repairs and maintenance, fuel, insurance in proportion to the kms that you have used to earn business income.

Also CRA wants the tax payers to keep a log of the number kilometers used for business and personal purposes. All the above expenses would have to be in proportion of the use of the vehicle for business purposes.

If you buy the vehicle instead of leasing, then instead of deduction for lease payments, you get a deduction for CCA on vehicles; everything remains the same (you still can claim all the operating expenses as deduction).

51. Karen Mullins says:

Hi Allan,
Kudos on your ‘Lease or Buy’ articles. They are the very best information I have ever read on the subject, and your gracious willingness to respond to so many different scenarios that people ask about for their specific circumstances is invaluable. Small, growing businesses, such as my husband and I operate, are so thankful that professional people like you are kind enough to share their knowledge. Sincere thanks, and I hope everyone who reads your articles will pay it forward when opportunity presents the chance to do so.
Best regards,
Karen

52. Carolyn says:

Hello,

I own an incorporated company. I am planning to lease a vehicle that would be used for the company for business purposes. I would like to put a \$4,000 down payment on the lease to reduce my monthly charges. How does the \$4,000 down payment work for tax purposes? As I am buying the car soon and I have a October 31 year end it won’t fit within the \$800/month limit. Can I not amortize over the life of the lease?

Kind regards,

Carolyn

Hello Allan:
Great article. My boyfriend is self-employed and he and I are considering opening a corporation. He wants to get a Nissan Juke that cost around \$25k new and \$15k used. However we have several questions. For optimal tax purposes, should he incorporate and get the car under the corporation name , as a self-employed or claim the car under his personal return?. What are the benefits of each?

Hope you can help us,
Thanks

1. superAmin says:

Thanks for contact me. Purchase the car through a corporation. The major benefits are that the corporation can pay for all of the car’s expenses, and it can get a refund of the HST paid when the car is purchased (assuming that the corporation is registered for HST).

54. Bruce says:

Hello Allan,
Very good article, I have a question similar to your article but dealing with purchasing a vehicle personally versus through a corporation (not leasing). prime use of vehicle would be for personal use, though will receive some business use, 25% business / 75% personal. New vehicle cost including taxes would be approx. \$75,000, what makes the most sense in this scenario, if you need more information let me know.

1. superAmin says:

Hi Bruce,

If the business-use of the vehicle is less than 50%, then I recommend that you either purchase or lease a new car personally, and not through a corporation. This is because there is a personal taxable benefit for the use of a company owned / leased vehicle, and this benefit increases significantly, if the business-use % is less than 50%.

55. Zack says:

Great article Allan! It’s very helpful indeed. Need your advice on the following scenario: A car is leased through corporation for 5 years. After the first year, the corporation is going to be dissolved due to loss and current economic situation. What options does a corporation have when it comes to terminating the lease?

1. superAmin says:

If the corporation is dissolved and lease payments are no longer made, then it its likely that the lessor will repossess the vehicle, unless you agree to personally take over the lease.

56. Oswaldt says:

I must say this article has helped me understand a few things but I am still quite confused as a few things seem to contradict each other when I go through the motions.

Wouldn’t it just always be better to lease, from a money’s point of view? If the maximum allowed payment that you can deduct is 800\$ a month, aren’t you better off always leasing?

Let’s assume the use would be 100% business.
– If you lease a brand new Audi S7 that costs 1,500\$/month, you get the full 800\$ credit per month at the end of the year? So the business actually put 700\$ out of pocket?

– And if you lease a brand new Honda Civic that costs 300\$/month, your business basically put 0\$ out of pocket for the car? So… free car in theory?

Why would you consider buying and having to worry about all those % and depreciation calculations? Why would you buy a depreciating asset anyway? for Pride? Sounds like a lot of headaches for pride haha.

Also, to quickly touch on taxpayer abuse, what is that exactly? I don’t understand it.
You can’t put a down-payment on the lease to bring the monthly payment down but why? Does taxpayer abuse mean that you claim the down-payment as an expense too? What if you don’t claim the down-payment? What if your down-payment is the “out of pocket” total that you paid upfront?

I guess the question is, when does it become taxpayer abuse?

Thanks again! You rock!

57. Hans says:

Hi, very informative article. Thank you very much, it was a great help.

However there is something i don’t quite understand…. In one of your replies you stated the following:

***If the business-use of the vehicle is less than 50%, then I recommend that you either purchase or lease a new car personally, and not through a corporation.***

I am in a similar situation where i am planning to lease a vehicle that will be mostly for personal use or to go to my company’s office ( considered personal use )…

So if we assume the followings:
– vehicule lease: 750\$ per month including taxes
– 100% personal use.
– personal marginal tax rate of 40%
– 100% of the actual operation cost (insurance, maintenance, fuel) are payed or reimbursed to the company instead of paying the 0.27\$/km

There would be no operation tax benefit as they are fully reimbursed to the company. I would have to pay the operation cost in full anyways if the car was leased personally. So there is no difference for the operation side of things. So lets consider only the lease cost.

For the standby charge, it would generate a 500\$/ month stand by charge (2/3 of 750). Which can be either reimbursed to the company or pay the tax on. Personally I would elect to reimburse it to the company although i m not sure its the best way tax wise.

The real cost to me would be 500\$ plus the income tax on this 500\$… 500*1.4 = 700\$ The company would absorb the other 1/3rd of the lease tax free(250\$). Total cost is then 700+250 = 950\$.

If i was to lease myself the cost to me would be 750*1.4 =1050\$ and 0\$ for the company.

So it seems to me like there is a small advantage to still go via the company, about 100\$ per month. Unless i am missing something.

If there is some actual pure business use however… at 0.55\$/km charge for a personally leased car it could off set the 100\$ difference rapidly.

Is my math/reasoning sound?

58. Mark says:

HI Allen, loved the article. Most of the comments seem to relate to small company vehicles but what if it is a big truck the type for hauling goods. My accountant doesn’t; seem to know much about trucking based on his questions to me and told me the only thing I can claim is the HST on my monthly lease payments. At the end of the 5 year lease I pay \$100 and the truck is mine so am I able to claim any depreciation at all. By then it will have cost me \$200K. The trucking company had said this was the only way to purchase unless i had cash. I am in my first year in business so am at a complete loss and devastated with my accountants final report. thanks in advance..

1. superAmin says:

Hi Mark,

Consider buying a used truck and arrange a loan through the vendor’s finance company or through a bank. This will cost less than a lease arrangement for a new truck. Lease payments for a truck to haul goods are fully deductible. Depreciation for a truck to haul goods that is purchased (with our without financing) is fully deductible and so is the interest on the loan.

59. mark says:

This information is fantastic and greatly appreciated!

I’m in sales, and my new company pays per/km (approx 45 cents). How does this impact the decision to lease vs. purchase? I’m looking to maximize my tax return. This car would be used 80/20 work/personal and assume the car is \$30K to buy and I’d replace the vehicle after 4 years regardless.

1. superAmin says:

Hi Mark,

If you drive a lot for work, you will be better off with a per KM allowance rather than a fixed monthly allowance (e.g. \$500 / month). The per KM allowance is tax free to the recipient.

60. Larry says:

1. superAmin says:

Hi Larry,

Thank you for your comment. So long as the cube van cannot seat more than the driver and two passengers, AND is used more than 50% of the time to transport goods, then it will not be subject to the \$30,000 cap for passenger vehicles.

I need more information to determine whether leasing or buying the cube van is a better option for you:
– lease term
– interest rate on finance
– monthly lease payment
– buy back option at end of lease term
– purchase price
– term of loan, if you finance

Your business can borrow the money from a friend, and write-off the interest, so long as there is a loan agreement and the interest is actually paid by the business to your friend.

Thanks,
Allan

61. NAJAB SALEEM says:

hi
i have a cooperation register in ontario can i lease a car under quebec registration.

1. superAmin says:

Hi Najab,
From a tax perspective, it’s best that the lease be in the name of the corporation. Please speak with the leasing company if they will allow this for a Quebec vehicle.

62. Collin says:

I have a Vehicle that I use for work 75% with an UDCCA currently of \$2660. I am looking at trading it in on a new vehicle with a purchase Price of \$37,245 with Freight and PDI (less taxes). The deal shows me \$8000 in value for my trade in. Is there a potential for a capital gain on the old car ? or do i use the Net sales price as the starting CCA on the new one ?

1. superAmin says:

Hi, Great question, Collin. In most circumstances, the transaction that you described below would result in taxable income of \$5,340, also called recapture. This is calculated as the difference between the trade-in value of \$8,000 and the UCC of \$2,660 for the vehicle being traded-in. However, since you are purchasing another vehicle, recapture will not result. The purchase amount (subject to the maximum allowed amount) will be added to the UCC of the class, on which you will continue to claim CCA annually.

1. Collin says:

Excellent, I was afraid i would be subject to a capital gain. So as I understand I would claim the half year rule on the full \$30,000 of allowable CCA for the 2016 tax year on the new vehicle?

1. superAmin says:

Hi Collin,

Yes, that’s correct.

63. Randy says:

Would it be more beneficial to have a higher tax write-off or claim if I will buy my own truck for my transport business across Canada and U.S. or lease it? Also, any idea how much I can claim for my meals and allowances for long haul driving with logbook? Can I still claim 80% like what the employed Truck Driver is getting? Or just 50% of my total meals receipts? Thank you!

1. Hi Randy,

Thanks for your question. The benefit of buying the truck (even if you get financing) is that the depreciation write-off will be high in the first few years of ownership. This will save you taxes.

With a lease, you will get the same tax-deduction each year for the lease payments made in the year. For me to determine which option is better, I need the terms of the lease agreement and the terms of the purchase contract. I can them compare them.

64. John says:

Great article! It covers acquiring a vehicle once you are already working as a sole proprietor quite well. One thing that isn’t clear to me is how it would work if you already owned a vehicle and then started to work as a sole proprietor. How do you determine the value of the vehicle to use for calculating the CCA (tax deduction)? If the vehicle had an original MSRP of \$27,500, and was sold one year old off rental for \$21,000, and the person started working as a sole proprietor and using the vehicle primarily for business travel 6 months later. The main questions are: 1) How do you arrive at the starting value of the vehicle for the calculation for year one, and 2) do you do the 1/2 value adjustment for year one like you did for a brand new vehicle? Thanks!

1. Hi John,

The depreciated value (or market value) when you begin using the vehicle for business purposes is the ‘cost amount’ for calculating CCA each year. In the year that you start using your vehicle for business, you can only claim 1/2 of the normal CCA allowable.

65. Dave G says:

Wow Allan, Great advice in here thank you.
My salary comes with the condition that I provide a car to take me and the company display to trade shows around the province. To start I’m just going to rent a car each weekend. I will occasionally be reimbursed for gas (when going out of GTA). I’m having them fill out a T2200 for me. My role is home based with travel every weekend. I will eventually lease I think based on this article but here is my 2 part question:

1) From reading your replies looks like I can claim the car rental in full correct? Even if its almost every weekend this year? All I need for records are my rental agreements/ receipts correct?

2) This is 100% for work, I’ll need monthly parking at my condo can I claim that as well?

1. Hi Dave,

You can deduct the full amount of the rental expense so long as your driving is 100% related to carrying out your duties of employment. Same for parking expense.

66. Derek Keal says:

Excellent article! Love the detailed analysis.

Question: How does the financing of a car get handled in taxes? Supposed the financed payments are \$500/month (obviously the payments include taxes). The amount includes the principle/interest (say P=400, I=100). When the annual taxes are being done, do you separate the principle and interest portions? If yes, do you further break down the principle (P/1.13) if you need to claim for HST?

1. Derek,

Interest on a vehicle loan is tax deductible up to \$10 per day. You should ask for an annual statement from the lender showing the total interest paid in the year.

HST does not apply to monthly loan payments. HST applies to the purchase price (regardless if the vehicle is financed).

67. Donald Paton says:

At the end of a lease a corporation pays the buy-out amount. It now owns the vehicle. Can the corporation now claim depreciation of that vehicle based on the buy-out amount the corporation paid as the value of the vehicle? In other words, the corporation gets to expense the larger lease amount that will be paid on a vehicle worth more than the \$30,000 CCA limit during the lease period, and then claim a full amount of depreciation on the same vehicle now that it is worth less than the \$30,000 limit?

1. Hi, Donald. Yes, you can claim CCA (capital cost allowance) on the buy-out amount to a maximum of \$30,000 over the life of the vehicle.

68. John says:

Great comparison and analysis here. Appreciate it. A lease offer I was looking at has a interest rate of 4.9%… if I wanted to reduce the amount of interest slightly I am allowed to put a downpayment of up to 45%. What happens if I lease a vehicle mid year, would I only be able to deduct that entire downpayment during this tax year? For instance… if I were to lease effective August 1…

The lease payment prior to downpayment is \$350… with a \$6500 downpayment it brings it down to \$180.

800-180 = 620 … 620 (August – Dec) * 5 = \$3100.

Would I only be able to claim \$3100 would of the \$6500 for my first year? I would loose out on the \$3400?

1. Hi John, if you were to lease a car mid-way through the year, then you can only deduct the lease payments that you paid starting from the lease commencement date. Note: do not make a large down-payment on a lease, since down payments are non-deductible.

69. Dave says:

Thanks for the excellent article.
Should the lease amount limit set by CRA \$ 800/month to be prorated if the price of the car is over 30,000.
I have leased a benz for my corporation. The before tax price is 51000 + 8000 (options) = 59000 and the lease amount is 804 +37 HST = 841 per month. How much is the allowable lease amount as per CRA?
Thanks
Dave

70. Ronald says:

Hi, im planning to get a Honda CRV. im driving 40,000-45,000km a year, 75% business 25% personal use. Is it better to lease or buy a CRV?

1. Hi Ronald, to determine which is better, you will need to compare the after-tax cost of leasing to the after-tax cost of buying. To do this, you will need to gather the following information first:

– Purchase price
– Interest rate on financed amount and loan term (e.g. 3 yrs, 4 yrs, etc.)
– Monthly lease amount
– Residual value at end of lease term
– Term of lease (e.g. 3 yrs, 4 yrs, etc.)

71. JennP says:

Great analysis! Looking for some advice. I am a Registered Massage Therapist who works both from an office in my home and does homecare (travels to clients). 30% of my business is travel. I am looking to either purchase or lease a vehicle for this purpose. Any suggestions on which route to go and what kind of price point to consider with relation to maximizing the income tax claim?

1. Hi JennP, to determine if it’s cheaper to lease or buy, you will need the following information:

1. Length of lease term
2. Monthly lease payment before taxes
3. Interest rate charged on lease
4. Residual value at the end of the lease term
5. List price of vehicle / purchase amount
6. Loan terms – amortization period, and interest rate

Then, you can crunch the numbers to figure out which is better.

72. Agnes says:

Hi,
First of all, thank you very much for this amazing article. I am self employed and am deciding between buying versus leasing. When I was reading about standby charges and operating cost in your article, I did not know how it will affect me. Can you please expand on that? I am a one person company/contract professional and the vehicle I drive is 60% for business. Can you please let me know how your calculation will be different for sole proprietorship? Thank you again for your assistance.

1. Hi Agnes, if you are a sole proprietor, you will not be impacted by the standby charge nor operating cost benefit.

73. Rick says:

Such a clear and useful example with real numbers. Cheers!

74. Rishi Raina says:

1. Hi Rishi,
For this analysis, I assumed that the person buying/leasing the vehicle is a sole proprietor, and so I applied a personal tax rate of 40% (assumption). If a corporation is buying or leasing a vehicle, then the corporate tax rate should be applied.

75. Sam sac says:

Hello and thank you for this post. I am an independent contractor physician can I deduct expenses for a lease car. I use my vehicle for work 80 percent work.

1. Hi Sam,

Yes, you can. If the lease is in your name, then your company can reimburse you for the lease payments and for any operating costs that you paid for (gas, insurance, repairs). The amount reimbursed to you should be included in your income (box 14 of the T4 Slip). You can deduct the employment-related portion (i.e. 80%) of your vehicle expenses on form T776 (Statement of Employment Expenses), which will reduce your personal tax.

Alternatively, your corporation can pay a tax-free vehicle allowance to you at a rate of 58 cents per kilometer for the first 5,000 kilometers and 52 cents per kilometer thereafter for employment-related driving. The corporation can claim a tax deduction for the allowance paid to you, and you do not have to include the allowance in your income.

U.S. & Cross Border Tax

Personal tax