Save tax on company cars

No matter what type of business you run— proprietorship, partnership, or corporation— with a bit of care, it’s easy to save taxes when buying company cars or trucks.

Capital Cost Allowance

Your business can’t run without vehicles and that usually means buying them outright, but in some cases those vehicles aren’t used enough, or don’t log enough mileage, to meet criteria that would permit a claim for full Capital Cost Allowance (CCA), a depreciation for tax purposes.

For example, if a van, truck, or similar vehicle can seat the driver and fewer than eight passengers, plus luggage, you must put that vehicle into a CCA class that caps the depreciable limit at $30,000, plus applicable taxes.

The problem is, pickup trucks can cost substantially more than $30,000. But if your business doesn’t meet any of the CRA’s exclusions, the CCA is still restricted and you end up with a big tax bill.

What’s excluded?

Vans, trucks, or similar vehicles, including SUVs, are excluded from the restrictions if they have seating for only the driver and two passengers, and are used mainly (more than half of the time) to transport business goods or equipment.

All other vehicles are excluded if, during the tax year the company owner buys the vehicle, it’s mostly used (90% or more) for the transportation of goods, equipment, or passengers to produce income. There is also an exclusion for vehicles used on remote work sites.

If your business purchases a pickup truck or SUV that seats more than three people, it could have the CCA restricted if its use isn’t 90% business-related in the year of purchase.

The rules don’t say how many months out of the year the vehicle has to be used. So if you were to buy the non-qualifying vehicle two weeks prior to year-end and only use it for business for those two weeks, then in theory, the business won’t have a restriction on the CCA claim.

However, you should keep written records of its use for those two weeks, and make sure your accountants know about the exclusion.

A side benefit of the exclusions is that the vehicle is also eligible for the full input tax credit on the GST or HST paid on the purchase.

Savings example

If a business owner purchased a $60,000 pickup truck, and didn’t qualify for any exclusions, only $30,000 is eligible for depreciation. The other $30,000 would not be available to shelter income from tax.

The aggregate tax saved from the extra CCA is approximately $4,000 for a small business, and up to $13,000 for an individual at the highest marginal rate. The tax savings depend on the tax rates of the business entity, and occur over a number of years as the vehicle depreciates.

So, a little planning on the timing of purchasing new business vehicles, along with proper documentation of their use, could save you substantial amount of money.