Access to a car can be essential to running a small business effectively. However, the cost of ownership can be high, especially in the early stages when your business is not very profitable. Fortunately, Revenue Canada and Revenue Quebec allow individuals and businesses that use their cars to generate income to deduct related expenses. As there are many different situations that can arise with car costs and also due to potential manipulations, both CRA and RQ provide detailed guidance on this topic.

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Below are some of the key provisions that impact small business owners:

General Rules for Deduction of Car Costs

If you buy your own car, the maximum cost eligible for the deduction is $30,000 + sales tax. In the first year of purchase, you are allowed to deduct 15% (CCA) of the car’s price, up to a maximum of $30,000, thanks to the semi-annual rule, which allows only 50% of the maximum depreciation in the year of purchase. For subsequent years, the deduction is 30% of the remaining balance.

Rental expenses are usually deductible up to a maximum of $800 per month + sales tax = $9,600 per year. So if your Porsche costs $1,400 a month to lease, the maximum deduction is only $800. An example of how this amount is determined can be found here.

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Factors to consider when deciding whether to lease or buy a car

Deductible vehicle costs include:

  1. rentals
  2. gas or fuel costs,
  3. insurance
  4. repairs and maintenance,
  5. license and registration fees
  6. driving license
  7. parking

A business owner should keep a mileage record that includes the name of the customer, supplier or other business purpose, odometer reading, date, etc. For example, if you drive to meet an accountant, this will be considered deductible.

When calculating kilometers traveled for work reasons, the journey from home to the usual place of work is not considered deductible. If the owner works out of their home office, any travel from the home office will be included in the business travel calculation.

Car Expenses for Non-Corporate Ownership (Solved and Universal Company)

Expenses related to your car are listed in a special section of your T2125 personal tax return called “motor expenses.” ALL costs must be prorated by the percentage of personal use of the car. This percentage is based on the number of miles driven for work versus the number of miles driven for personal purposes.

For T2125 purposes you will need:

  1. a) Company km traveled during the year
  2. b) Total number of km traveled during the year

Divide a) by b) to get the percentage of business usage that can be applied to the above charges.

The cost of the car can be written off based on a percentage of the company’s use during the year up to a maximum cost of $30,000.

The CCA (Capital Cost Allowance) class for most cars is Class 10 if the car costs $30,000 or less OR Class 10.1 if the car costs more than $30,000 Interest costs on car financing can also be deducted.

If you are registered for GST (and HST/QST), you can claim a portion of the sales taxes that are based on the CCA rate you claim each year.

Car Expenses for Employees / Company Owners

Companies have more flexibility in recovering car costs and have three options:

  1. per kilometer rate: The easiest option for a business owner and/or employee is to apply for a per kilometer rate allowed by Revenue Canada. For 2021, the rate is $0.59 per km up to 5,000 km and $0.53 per km over 5,000 km.

The company can pay this amount to the employee/owner without any tax consequences. This too will be considered a company expense and will be entered into the car expense account. By choosing this method, no additional expenses related to the car can be requested. The employee/owner must maintain a mileage log to substantiate the required mileage.

  1. Company car ownership: A company can buy a car for employees or owners. In this case, the company may claim 100% of the costs associated with the car, including lease payments or interest and depreciation (subject to the above limits).

The direct purchase of a car from the company gives the employee/owner a taxable benefit for the % of personal use of the car. You must keep a car log showing the percentage of personal and business use. The taxable benefit can be calculated using the CRA calculator

If the car is used less than 50% of the time by the employee/owner, the taxable benefit and resulting tax burden is significantly higher than using the per-mile method.

  1. Fixed Monthly/Recurring Car Allowance: A company may decide to provide a fixed monthly car allowance to its employees. This will be tax deductible to the company, however the full amount of the car check must be reported as income in the employee’s 4th quarter.

The employee can then deduct the above expenses on their tax return on board the T777, which is an employee expense report and has a separate section for motor vehicle expenses. to claim the expenses Please note that the employer must complete and sign the T2200 Revenue Canada, while recognizing the deductibility of car expenses, wants to ensure that businesses do not benefit from the personal use of a car (while non-business people do not). Finally, common sense must be used: expenses incurred to generate income are deductible. Expenses that are clearly personal in nature are not.

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