If you are using your vehicle to earn income, you may be eligible to deduct your car expenses when you file your income tax. Leasing, financing, or paying cash for a vehicle all have different tax exemptions. I’m going to answer a few questions so you’re all prepared when your shopping for that next new or pre-owned car.
Buying a car with cash permits the owner to claim only the depreciation per year on the vehicle, so long as the purchase price is $30,000 or less before tax.
To calculate the depreciation, take the original purchase price of the vehicle and minus the current average selling price of similar vehicles currently available. For example, if you bought a minivan for $30,000 last year and similar models are selling for $26,000 now, you have $4000 to claim as depreciation. Depreciation is limited to 15% of the cost in the year you buy the car and 30% of the declining balance for every year after that. Based on this formula, eventually, you will claim 100% of the cost of your car.
If you purchase a car for more than $30,000 you will not be able to make a claim on any excess amount paid. However, if you have a loan on the car purchased, you will be eligible to deduct the interest paid on the loan to a maximum of $300 per month of interest charges.
You can purchase a vehicle for more than $30,000, but everything above that amount is not eligible to be claimed. The most depreciation happens in the first couple years of a cars life so buying an older car may not provide a decent write-off. If you are a prospering business and needing write-offs, something newer will give you more to claim.
Your eligible amount to claim is limited to the amount you use for business. If the vehicle is used 75% of the time for business, only 75% of the yearly amount can be claimed. Because of this, some people decide to have two vehicles – one personal and one business.
People leasing a vehicle for business can claim the whole monthly (or bi-weekly) payment as a write-off up to a maximum of $800 plus tax. For example, if you have a $500/month lease (tax incl), you can claim $6000/year. Again, only the amount used for business purposes is eligible to be claimed.
Once you have found the right vehicle, you can ask yourself these questions:
If you answered yes to most or all of these, then purchasing is the way you should go. If you enjoy a newer car every four years with extensive repairs, and the leasing payments are more in your budget, then leasing is what you should do.
To help you select the right vehicle, shoot me a message. I’d be glad to help.
PS. I am not or pose as a BC tax law expert. You can get to the vehicle leasing section of Revenue Canada by clicking here.