Deduction of Automobile Expenses
What is the best way to deduct car expenses?
Our accounting firm often get asked tax questions from our clients located in Vaughan and throughout the Greater Toronto area on what is the best way to deduct automobile expenses. Your options are to either buy/lease a car through a corporation, or buy/lease it personally. There isn't a best answer; it depends on the number of facts. We summarized the general information regarding each method.
Scenario 1. Business owner owns or leases a car personally.
This may be the easiest way to claim deductions. Your corporation will reimburse the owner for each business kilometre driven for a business purpose. The compensation rate in 2018 is 55 cents/km for the first 5,000 kilometres and 49 cents/km thereafter.
Example: A person drove 13,000 km for a business purpose in one year.
5,000 km * .55 cents = $2,750
8,000 km * .49 cents = $3,920
Total 13,000 km =$6,670
In this example, $6,670 is the deduction that the corporation will claim for the car expense reimbursement to employee or shareholder. The corporation will issue a cheque for $6,670 to the shareholder. The money received by the person is not taxable income.
All car related expenses (i.e. lease or loan payments, gas, insurance, repairs and maintenance and etc.) are to be paid by the business owner from personal funds.
It does not matter whether the person owns or leases an expensive car or drives a cheap used vehicle. The same compensation rate per kilometre is used – 55 cents / 49 cents.
In case of the CRA audit, you have to provide a mileage log that supports the business kilometres driven.
Scenario 2. Corporation owns or leases a car
In a situation where a corporation leases or purchases a car, all car related expenses are paid by the corporation and a taxable benefit is allocated to the business owner for the personal use of the vehicle.
Taxable benefit is the notional amount which is added to the individual's taxable income and it is subject to income tax. Taxable benefit depends on the number of kilometres driven for personal use and the cost/lease of the car. Keep in mind that your commute from home to your place of work is generally considered personal travel. Taxable benefit may result in a few thousands dollars added to the individual's income. Mileage logs must be presented to the CRA in case of audit.
Also, depreciation and lease expenses are restricted to certain threshold amounts.
Company owns a car
Cost limit for depreciation purposes is 30,000 before HST. For instance, if a company purchases a car for $50,000 plus tax, only 30,000 will be eligible for depreciation and the remaining $20,000 will never be deducted for tax purposes.
Company leases a car
The leasing expense is generally restricted to $800 + tax per month. However, if the cost of the car exceeds $30,000 plus tax, the allowable lease expense is prorated and reduced.
In many situations you will achieve approximately the same result if you buy/lease a car personally or through a corporation.
In a typical situation, the tax results will be very comparable for a car that costs $30,000 plus HST, has a mileage of 24,000 km per year and 75% is driven for business use. When deciding to buy or lease, you should also consider other factors such as years you want to use the car, interest rates, insurance cost, residual value and etc.
However in the following situations, the recommendations are:
1. If you consider buying or leasing a car which costs much more than $30,000 plus taxes, it is usually better to do it personally rather than through a corporation. The reason being that you will not be able to legally deduct all depreciation or lease payments. However your taxable benefit will be calculated on the full amount.
2. If you expect very little kilometres to be driven by the car and more than 50% will be for business, buy or lease it through a corporation. The reason is that if you own/lease it personally, the car reimbursement you receive from the company will be very low. That will be more beneficially to own/lease it through corporation and deduct all car related expenses. The taxable benefit allocated to you is expected to be low if you drive few personal kilometres.