Our trades and construction clients often ask us: “Should I purchase my vehicle through my company or own it personally?” It’s an important question with a lot of tax and financial implications. The answer isn’t straightforward, either. Typically, we’ll ask a few questions to determine whether our clients would benefit more from personal or business ownership of their vehicles.
These are the questions we ask our construction clients before they purchase a vehicle:
- How many kms will you drive it for business purposes?
- How many kms will you drive it for personal purposes?
- What is the purchase price of the vehicle?
- If leasing instead of buying, what are the lease costs?
- What are the expected operating costs?
It’s important to note the difference between personal kilometers and business kilometers. Personal use of the automobile includes:
- Driving from your home to your place of work
- Vacation travel
- Driving to conduct personal business
If your home is also your place of work and you are required to travel away from your place of work, this is considered business travel.
It is important to determine and record the difference between personal kilometers and business kilometers.
It is very important that you maintain a log of all business kilometers driven and also track total kilometers driven in the year. This log book should show the reason for the business travel, the dates of travel, and the distance driven. You can also use digital tracking systems for your logbook. There are many apps that can help you track kilometers, including these ones we’ve personally reviewed.
The Benefits of Personal Vehicle Ownership for Trades
If you use your own vehicle for business purposes, a tax-free allowance can be paid to you for business travel. Owning a vehicle personal means all vehicle expenses must be paid for personally, including gas, repairs and maintenance, insurance, car washes, etc. The only vehicle related expense which should still be paid by the corporation is parking for business purposes.
The compensation to you for business use of the vehicle will come through the tax-free allowance. This means you’ll multiply your business kilometers by a specific dollar amount.
The simplest way to pay yourself is to pay an allowance based upon the rates provided by the Canada Revenue Agency (CRA) as shown in the chart below:
|Reasonable Allowance for 2018
|First 5,000 KM
|Each additional KM
The Benefits of Corporate Vehicle Ownership for Trades
When a vehicle is purchased or leased in a corporation, the company has the benefit of deducting capital cost allowance (depreciation) or lease payments, along with the vehicle operating costs. This amount is calculated and paid from your taxable income, which means it will reduce the amount of corporate tax owing. Typically, vehicles purchased by the company are used by you as well, which results in a benefit to you that is either added to your T4 as an employee benefit or charged to your shareholder loan account.
If you aren’t sure if corporate ownership is right for your trades or construction company, you should consider the following factors before deciding:
1) Distinction between an automobile vs. a motor vehicle
The CRA has two tax classifications for vehicles: automobiles and motor vehicles. A motor vehicle is typically a truck, van, or SUV where 90% of the time, the vehicle is used to transport goods and equipment for business purposes.
An automobile is a vehicle that is used less for business use, and more as a mode of personal transportation. The CRA restricts claims for automobiles to $800/month for leasing costs, and to $30,000 plus GST for capital costs.
The CRA caps for claims on automobiles do not apply to motor vehicles.
What’s most important to note is that the classification is determined in the year of purchase. Any change in use in a subsequent year does not change the tax treatment of the vehicle. So, if you purchase a vehicle under the automobile classification and in the second year use it as a motor vehicle, it is still classified as an automobile.
There are other factors that may be applicable in determining the classification. Please contact us for clarification if you are unsure how your vehicle will be treated.
2) Buying versus leasing
When a vehicle is leased, the lease payments are deductible in the corporation. When a vehicle is purchased, the deductible expenses include the interest expense (if financed) and the capital cost allowance (depreciation). The total deductions over the life of the vehicle tend to be close regardless of whether the vehicle was leased or purchased.
The interest rates for purchase are more relevant than the annual income tax deductions for leasing. Therefore, the decision to lease or buy should be viewed as a financing decision.
3) Standby charge and operating benefit
A standby charge and operating cost benefit must be charged for any personal use when vehicle ownership is through the company. This amount is either added to your T4 as an employee benefit, or charged to your shareholder loan account. It is important to note that the standby charge is calculated using the original cost of the vehicle every year, regardless of how much it has been depreciated.
So, whether or not you own the vehicle through your trades or construction corporation, you have to record the kilometers for business and personal use. You can find out how to do that here.
The standby charge can be calculated in two ways. The first is for monthly use of the vehicle, calculated as follows:
[2% x original cost (including GST) x number of months the vehicle is available for use]
If the automobile is used >50% for business, the standby charge can be reduced by the following formula:
[Personal km’s driven / (months x 1,667)]
The operating benefit is calculated as follows:[Personal km’s driven x $0.27]
Note: When the business use is greater than 90% of the total kilometers driven, the standby charge and operating benefit are insignificant.
Ownership of a vehicle in the trades and construction industry often depends on who will be using it. As the business owner, you might be more likely to use a vehicle for personal and business use. Meanwhile, an employee is likely to drive a vehicle primarily for business use.
Typically, when a vehicle is driven greater than 90% of the time for business use, it is better to have vehicle ownership in the company. This is the case especially if it is a newer or more expensive vehicle. The tax savings resulting from the automobile expenses will generally outweigh the tax on any personal benefit incurred.
When business use drops below 90%, the standby charge and operating benefit taxable to the individual can become significant. Over time, it may be greater than the deductions available to the corporation. This is because the standby charge is calculated using the original cost of the vehicle every year, regardless of how much it has depreciated.
When looking at personal vehicle ownership, other factors need to be considered. For example, you’ll need to think about the tax consequence from taking funds out of the corporation in order to purchase the vehicle.
Thanks to the complex factors of vehicle ownership, there’s no easy answer for any trades or construction company. However, making the correct decision could save you hundreds of dollars over the lifespan of the vehicle. If you’re thinking about purchasing a vehicle and want to learn all the benefits and costs of each arrangement, please feel free to call us 780.488.4011, or email us here.