If you have business owner clients who have to purchase cars or trucks for their companies, there are easy ways to help them save tax. And this strategy works regardless of whether the business is a proprietorship, partnership or corporation.
Capital Cost Allowance
Many businesses require cars to operate, and most companies buy them outright. In some cases, these vehicles aren’t used enough, or don’t log enough mileage, to meet certain criteria that would permit a claim for full Capital Cost Allowance (CCA), a depreciation for tax purposes.
For example, if a vehicle can seat the driver and fewer than eight passengers, plus luggage, and is a van, pickup truck, or similar vehicle, the taxpayer 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 the business doesn’t meet any of the CRA’s exclusions, the CCA is still restricted. This results in a larger tax bill to the business owner.
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Vans, pickup 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 primarily (more than 50% 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, and 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 in remote work sites.
If a business is purchasing a pickup truck or SUV that seats more than three people, it could have the CCA restricted if the vehicle is not used more than 90% for business 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 a business 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, the company should keep written records of the use for those two weeks, and must ensure their accountants are aware of 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.
The input tax credits determine whether the vehicle is excluded for the rules, but the capital cost is reduced by any tax credits received.
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 a substantial amount of money.
Dave Cesmystruk, CA, is an accountant with taxation services in MNP’s Abbotsford office.