If you have one of the more than 25 million road motor vehicles registered in Canada, then you should make sure your car is driving your costs down. Deducting automobile costs is a very important part of tax planning for many small businesses, one that comes with many rules and restrictions.
Generally, any expense incurred to operate a vehicle can be deducted, including: fuel, insurance, maintenance and repairs, interest, lease costs, and more. However, it is important to keep track of all business kilometers driven at the beginning, end, and throughout the year, along with all automotive receipts. To help me keep track, I keep a logbook in my car that I fill out after each trip.
There are significant tax savings to be had throughout the vehicle buying and ownership process. Here are a few tips:
Purchasing a Vehicle
There are special rules in place to prevent business owners from purchasing high-cost luxury vehicles and writing them off for business purposes. These rules only allow you to write-off up to $30,000 of the cost of a passenger vehicle, along with many other restrictions. However, if you are purchasing a vehicle that is not for passengers, such as a pick-up truck, then there is no limit.
Lease or Finance?
Similar to when you purchase a vehicle outright, there are limits on the amount that you can write-off when you lease or finance the purchase of a vehicle. If your lease costs exceed $800 per month plus HST then there are restrictions imposed to limit your tax write-off. One way to avoid this is to keep your month lease cost as low as possible by excluding insurance, repairs, maintenance, and licenses from your payments. If you are financing your vehicle, then the maximum amount of interest that you can write-off is $300 per month. One way to ensure that you come in within this limit is to bring down your interest payments by making a large enough down-payment upfront.
Vehicle Ownership: Personal or Business?
This decision ultimately comes down to how much the vehicle is going to be driven for business purposes. If the vehicle is driven 90% for business purposes then it makes the most sense to have it owned by the business. However, if this percentage is less you might want to consider registering it to you personally. The reason for this is that there are strict rules imposed on those who use vehicles owned by their business for personal purposes. This can add a lot of complexity and come at a significant cost to you. Instead, you can charge your company a reasonable car allowance for the business use of a vehicle registered to you personally. This will save you tax and a lot of hassle.