You’ve made the decision to be self-employed and to drive as part of your business or you need to drive to your clients…now what? Deciding whether to buy or lease a car for your business may seem very tricky but we’re here to help make this decision less complicated for you. Check the CRA link for motor vehicle expenses.
For starters, you can deduct the business percentage of your gas, oil, insurance, parking fees, registration fees, lease, repairs, tires, loan interest, etc. for both leased and purchased vehicles. The good news is that if you’re eligible to deduct car expenses from your business, the deductions available over a period of time are exactly the same whether you lease or buy your car.
Leasing from a Tax Standpoint
You can deduct the business percentage of your lease payments. For leased vehicles, the limit on the monthly lease payment that you can deduct is $800 per month plus HST, which works out to a maximum of $9,600 in expenses that are tax-deductible annually. You should definitely consider this when choosing to either buy or lease your business vehicle.
Here’s a simple example to help you understand this a little better:
If your yearly lease payment is $4,200 (that’s about $350 per month) and your business use percentage is 80%, you may be able to deduct $3,360 on your tax return for that year. That sounds pretty awesome but there is one slight hitch. Since the CRA tax rule limits the depreciation on “luxury” cars, it also limits (to a very small degree) lease payments on such a car.
FYI: In Canada, vehicles that cost $30,000 before HST are technically luxury vehicles under the Canada Revenue Agency guidelines. Make sure that you take that into consideration when deciding to lease or buy your car.
Essentially, the higher the price of the car, the more preferable leasing usually becomes.
For a sample of what you might be eligible for, use the CRA Chart C, to calculate for you.
Buying from a Tax Perspective
There are still some expenses that differ between purchased and leased vehicles. The biggest difference being the interest that can be deducted when a vehicle is purchased versus leased. So, if you decide to buy your business vehicle outright, what you spend on the cost of your car is deducted at a rate decided upon by the CRA. This deduction is called Capital Cost Allowance, or as it’s more widely known depreciation.
This is quite a bit different from leasing because when you’re leasing a car you don’t own it. So, you can’t depreciate its worth and claim any Capital Cost Allowance.
There are different CCA classes for vehicles depending on the vehicle type; class 10 for passenger vehicles which in most cases cost $30,000 or less before taxes. Motor vehicles that are not considered passenger vehicles fall in class 10.1 and in many cases cost more than $30,000. Class 16 is used for trucks. A zero-emission passenger vehicle (ZEPV) is considered class 54 even if they would usually fall in the previous class 10 and 10.1. ZEPV that would usually be in class 16, now has a new class 55. For the list of the depreciation values for different classes, visit this CRA link.
Here’s another example:
If you purchase a passenger car, new or used, for $30,000 or less before HST, you will use class 10 to depreciate 30% of the value every year. However, in the first year of use in business, you can deduct 15% only of the cost and 30% of the declining balance for every year after that until you have claimed 100% of the cost of your car. If you started to use the car for business years after you have purchased it, you will have to estimate the FMV of the car in the year you are claiming CCA instead of using the cost value.
If you buy a passenger vehicle the fits in class 10 for more than $30,000 you will not be able to make a claim on any excess amount paid. You still have to claim CCA on $30,000 plus tax. However, if you took out a loan in order to buy the car, you will be eligible to deduct the interest paid on the loan to a maximum of $300 per month of interest charges, the amount decided upon by the CRA.
Don’t forget, if you purchased the vehicle, you can also deduct the interest on the vehicle’s loan based on the percentage of time that it’s used for your business.
Timing is Everything
As with many things in life, timing is key. If you buy your business vehicle on December 31 of any year will result in the same deduction available as a purchase on January 1 of the same year.
When leasing a car, a contract entered into earlier in the year will result in more months of payments being eligible and therefore a higher deduction for the year, however, a contract entered into in December will result in no deduction as no payments have been made on the lease for the year.
The disposition of the vehicle can be pricy if you choose to purchase versus lease. When you dispose of a business vehicle that you own, there may be a taxable gain or deductible loss. The portion of any gain that is due to depreciation will be taxed as ordinary income. This is quite contrary to when you return your leased car to the dealer as there is no taxable gain or loss.
Other Factors to Consider
As with most decisions in life, taxes should only be one of the considerations. Here are a few of the non-tax considerations on buying or leasing a business vehicle:
- The number of miles you drive each year. Leased cars are often charged extra fees for kilometers driven over 24,000 per year.
- How long you keep a car. Would you like to get a new car every 3 to 4 years or keep it until its junk?
- How much do you want to spend on your monthly payments? Lease payments are usually quite a bit less than monthly payments on a car loan.
There is no definite answer to the lease versus buy question for small business owners. Buying is generally more cost-effective, though the tax deduction also tends to be on the lower side. If you use a per km allowance to reimburse yourself from your corporation (the unincorporated small business cannot use this method as you are essentially reimbursing yourself), you can save yourself paperwork, however, in a year with high operating expenses (e.g. repairs), you may be missing out on a higher deduction. If you excel at making spreadsheets or you have good accounting software like QuickBooks, it might make sense to keep track of both and use the more beneficial method to ensure the lowest tax liability at the end of the year.
Whether you buy or lease, TurboTax Self-Employed makes it easy to claim your vehicle expenses.
If you need more help, consider TurboTax Live Assist & Review, and get unlimited assistance and advice as you do your taxes, plus a final review before you file. Or, choose TurboTax Live Full Service and have one of our tax experts do you return from start to finish.