The Canadian tax code is a scary and intimidating topic. Every year, there are updates and changes to the infinitely complex rules governing how much tax you must pay, and what expenses you can claim as deductions.
Rule number 1: Always consult a certified professional accountant (CPA) so that you keep your balance sheet in good order.
While household, family and business costs will dominate much of your deductible expenses, we are here to remind you of certain exemptions regarding personal and business vehicles.
Aside from a few rare exceptions, vehicles are generally considered a depreciating asset. There are, however, several ways to minimize this pain by capitalizing on savings when it comes time to file your taxes if you meet certain criteria set out by the Canada Revenue Agency (CRA).
“It’s important to do your tax homework when deciding between buying or leasing a new or used vehicle,” says Jonathan Yarkony, Senior Editor at autoTRADER.ca, “Consider your options and weigh the many variables to find the solution that best meets your personal situation.”
We took a deeper look at leasing vs financing a vehicle for small business owners earlier this year. Claimable expenses vary according to whether a vehicle is leased or financed, so it pays to consider your payments based on when you acquire you’re the vehicle. With leasing, the down payment can be claimed as part of each month’s allowable maximum, so the earlier in the year you lease, the more likely you are to be able to claim the entirety of the down payment. When financing or buying outright, you can claim an entire year’s depreciation even if you purchased the vehicle near the end of the year. In essence, our rule of thumb is to “Lease Early, Buy Late.”
However, there is much more to the tax code than when you acquire the vehicle, and here are a few situations where you might be able to save money at tax time and avoid trouble with the tax man.
Allowable Expenses
In cases where you are self employed, and even some jobs where your employer doesn’t provide a car allowance, the criteria for tax deductible expenses related to your vehicle includes basic operating costs, such as fuel, insurance, maintenance, licensing, registration and delivery fees.
Small Print
The “capital cost allowance” is the amount you are able claim as a vehicle expense, which also includes the cost of leasing or interest of a loan taken out to finance or purchase the vehicle. So depending on what you drive and how far, it could lead to a significant amount.
The Devil is in the Details
Not everyone who is eligible for these deductions takes advantage, but there are restrictions and limitations. Unfortunately, simply commuting from home to work isn’t considered an eligible driving expense. However, if you use your personal vehicle for work travel, you could be entitled to tax deductions.
No Double Dipping
You will also require confirmation from your employer that you have not been reimbursed by the company. The CRA doesn’t let you double dip. Alternatively, working from a location aside from your employer’s office may permit certain financial incentives when tax season comes around.
Mixing Business with Pleasure
If you happen to use your vehicle for both work-related transportation and personal use, you are expected to track mileage to determine the amount that you are able to deduct. For instance, if your vehicle use is 75 percent work-related and your yearly operating expenses were $2,000, you would be able to claim $1,500.
While deductible amounts depend on income and usage, the upper limit you can claim for automotive expenses is usually $800/month, so we took a look at ways you could structure a lease to make the most of that limit with vehicles ideal for a few common self-employed professions and small businesses.
Taxes are serious business, and small business owners, entrepreneurs and self-employed individuals in particular would be wise to consider every aspect of their vehicle acquisition and use and consult with a reputable accountant to maximize the deductions from your vehicle and driving expenses.
