Automobile Expenses

We are often getting questions from our clients on what is the best way to deduct automobile expenses. Buy or lease a car under corporation, or buy or lease it personally. There is no one best answer; it depends on number of facts. We summarized general information regarding each method.

Scenario 1. Employee or shareholder owns or leases a car personally.

This may be the easiest way to claim deductions. Corporation reimburses employee or shareholder for each business kilometer driven for business purpose. Compensation rate in 2009 is 52 cents per kilometer for first 5,000 kilometers and 46 cents thereafter.

Example: Employee drove for business purpose 13,000 kilometers

            5,000 km * .52 cents = $2,600

            8,000 km * .46 cents = $3,680

Total   13,000 km                     $6,280

In this example $6,280 is deduction that corporation will claim for car expense reimbursement to employee or shareholder. The corporation will issue a cheque for $6,280 to employee or shareholder. Money received is not taxable income on personal level.

All car related expenses (i.e. lease or loan payments, gas, insurance, repairs and maintenance and etc.) to be paid by employee or shareholder.

It does not matter whether a person owns or leases an expensive car or drives a cheap used vehicle. The same compensation rate per kilometer is used – 52 cents / 46 cents.

In case of CRA audit you have to provide mileage log supporting business kilometers claimed.

Scenario 2. Corporation owns or leases a car

In situation when a corporation leases or purchases a car, all car related expenses are claimed by corporation and a taxable benefit is allocated to employee or shareholder for personal use of the vehicle.

Taxable benefit is notional amount which is added to individuals taxable income and it is subject to income tax. Taxable benefit depends on number of kilometers driven for personal use and cost/lease of the car. Keep in mind that commute from home to your place of work is generally considered personal travel. Taxable benefit may result in a few thousands dollars added to individuals income and taxed at top marginal rate. Its calculation is discussed here.

Also, depreciation and lease expenses are restricted to certain cost threshold amounts.   

Company owns a car

Cost limit for depreciation purposes is 30,000 + taxes (in 2009). For instance if a company purchases a car for $50,000 plus taxes only 30,000 + taxes will be eligible for depreciation and remaining $20,000 will never be deducted.

Company leases a car

Leasing expense is generally restricted to $800 + taxes per month. However, if the cost of the car exceeds $30,000 plus taxes the allowable lease expense is prorated and reduced.

Tax Advise

In many situations you will achieve approximately the same result if you buy/lease a car personally or through corporation. In a typical situation a car costing $30,000 plus tax which runs 24,000 km per year and 75% is for business use – tax results will be very comparable. When deciding to buy or lease you should also consider other factors such as years you want to use the car, interest rates, insurance cost, residual value and etc.

However in the following situations are recommendations are:

1. If you consider buying or leasing a car which costs more than $30,000 plus taxes it is usually better to do it personally rather than through a corporation. The reason is that you will not be able legally deduct all depreciation or lease payments. However your taxable benefit will be calculated on the full amount.
2. If you expect overall few kilometers driven by the car and more than 50% will be for business buy or lease it through corporation. The reason is that if you own/lease it personally the car reimbursement you receive from the company will be very low. That will be more beneficially to own/lease it through corporation and deduct all car related expenses. The taxable benefit allocated to you is expected to be low if you drive few personal kilometers.