As a small business owner, you’re always looking for ways to maximize profits and make your company run as efficiently as possible. Using a vehicle for your business represents one financial aspect of running your company that deserves a closer look. The Canada Revenue Agency (CRA) allows you to write off the use of a vehicle for your business. On top of deciding how you want to claim your tax deduction, you need to decide whether or not you should use personal vehicles as part of your business or purchase a company car that’s only for business purposes.
In both cases, the answer comes down to which option offers more advantages from a tax standpoint. Once you know the applicable rules, you can do the math and make an educated decision.
Using a Personal Car for Business Purposes
Your company can reimburse an employee for using a personal car for business purposes in the form of a motor vehicle allowance. The allowance isn’t taxable if it’s reasonable under the circumstances and based on per-kilometre calculation. You should include this benefit on the employee’s T4 slips as a taxable benefit. If you don’t reimburse the employee, they may be able to claim a deduction on their income taxes.
To determine if your car allowance is reasonable, the CRA takes into consideration the type of vehicle and the driving conditions. Many businesses use the per-kilometre rates found in the appropriate section of the Income Tax Regulations. The per-kilometre rates offer easier accounting and less tracking of expenses, which could save you time and money when filling out your business income tax forms. For 2018, the per-kilometre rates are 55 cents per kilometre for the first 5,000 kilometres driven and 49 cents per kilometre driven afterward.
These allowances may or may not cover the cost of using your vehicle, so you need to determine if this is advantageous in your particular case. If you have a small, inexpensive vehicle, 55 cents per kilometre may actually be more than your running cost, so the tax-free allowance may be profitable. Conversely, if you drive a large luxury vehicle, you may be out-of-pocket on motor vehicle expenses if you go the per-kilometre route.
The alternative is to track how many miles employees drive for business use versus their personal use. Determine how much gas they use during this time, and take into account insurance, maintenance costs such as oil changes, and even depreciation as the car’s value falls every year. For example, imagine an employee drives their personal vehicle 50,000 kilometres during the year, and 40,000 of those miles are for business use. Since 20,000 / 50,000 = 0.4, the employee can claim 80% of the motor vehicle expenses. While this method involves more record-keeping, you might see more tax savings from it if employees use their cars for business use on a regular basis.
Keeping accurate records with robust accounting software such as QuickBook lets you easily do the math when determining whether to use a per-kilometre rate or using the actual expenses an employee incurs. One thing to keep in mind is that the kilometres driven from an employee’s home to your place of business are always considered to be for personal use.
Buying a Company Car
From a company standpoint, buying a vehicle allows you to deduct all the costs associated with it and claim capital cost allowance on the purchase.
If you decide to use, or let employees use, a company vehicle for personal reasons, the CRA taxes that benefit in two ways: first as a standby charge and then as an operating expense benefit. The standby charge represents the benefit employees get from having the car available for personal use. The standby charge amounts to a taxable benefit on an employee’s T4 slips, unless the employee reimburses you for using the car on personal time. The operating expense benefit is the tax deduction you derive for the vehicle’s maintenance during its lifetime.
The actual calculation of the benefits varies greatly with a company car based on two factors: the value of the car and the percentage of personal use you make of the car. As a general rule, the more you use the car for personal reasons, the less favourable this option becomes. Another thing to consider is depreciation, or the reduced value per year over the life of vehicle, when taking the capital cost allowance benefit.
Imagine that you buy a car exclusively for business purposes for $10,000. After the first year and in subsequent years, the car lowers in value by $2,000 a year until its useful life ends after five years. You can claim up to 30% of the depreciable value, or $600 per year, as a tax deduction.
The Benefits of a Company Car Over a Personal Car
When considering the company car option, the depreciation and capital cost allowance may help you decide which option is more advantageous, especially if you buy a newer vehicle. You can also deduct other expenses relating the vehicle, such as maintenance, insurance, and possibly interest on a loan. The other advantage to having a business car is that you have full control over the vehicle.
As you decide whether a company car or personal car is the right choice, you can use the CRA’s Automobile Benefits Online Calculator to determine the actual taxable benefit that applies to your specific situation. Don’t be afraid to ask questions of your fellow business owners to see what works for them, as they may have insights into the pros and cons of a company car or personal car.
In either case, you must keep detailed records of the kilometres driven and/or expenses for both personal and business purposes. You can maintain these records with a paper logbook, use one of several available apps for GPS enabled smartphones, or track expenses and mileage using robust accounting software such as QuickBooks. More than 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.