As a business owner you probably spend a lot of time in your vehicle; driving to meetings, tradeshows, networking events, making deliveries and more. Eventually a time will come where your current vehicle just won’t do anymore, so the question will arise, do you buy or lease a new car? What are the tax deductions for cars? It’s one of the most common questions accountants get from small business owners, and the answer is always “it depends”.
Buying a Car
From an income tax perspective, if you are eligible to deduct car expenses from either your business or employment income, these tax deductions for cars will be available over time are the same whether you lease or buy.
What you spend on the cost of your car is deducted at a rate decided upon by the Canada Revenue Agency (CRA). The deduction is called Capital Cost Allowance or you may know it better as depreciation.
So long as you purchase a car, new or used, for $30,000 or less before HST, you can deduct 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.
Leasing a Car
If you lease your car, you are able to deduct the monthly lease payments so long as they do not exceed $800 per month plus HST. In rare cases it may be lower but in general, CRA sets the limits ensure that the level of deductions for leased automobiles is similar to that for purchased ones. The downfall of leasing a car is that the initial down payment you make is not deductible in one lump but rather spread out over the life of the lease and therefore becomes part of the monthly lease payment.
The above being the case, the benefit of one over the other hinges on the timing of your purchase, the type of car owner you are or would like to be, and your overall financial circumstances.
Timing is Everything
The timing of the purchase is important. A purchase on December 31 of any year will result in the same deduction available as a purchase on January 1 of the same year.
On the other hand when leasing a car, a contract entered into earlier in the year will result in more months of payments 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.
What Type of Driver are You?
The type of car owner that you are is important. If you are a person who drives few kilometers in a year and enjoys driving a new car then your best option is to lease a car and in effect rent a new car all the time. However, if you intend to drive your car until it’s dead, you should buy your car, as the cost of a lease will far outweigh your borrowing costs in the long run.
Let’s take the example of a car that costs you $500 per month on a lease, no down payment and a buy out after 3 years of $10,000. If you can buy this same car for $25,000 with 0% financing, you would save yourself $3,000 and that is assuming, you don’t drive over the allowable kilometers in the year and have the $10,000 sitting in the bank in 3 years!
Know What you can Afford
Finally, your overall financial circumstances may dictate what you should do. Using the above example, if your 0% financing is only for 3 years, your monthly payments would be $694 per month. If you do not have the extra $194 to spend on a car payment, then your only option is to lease. Final Tax Write Off Now that you know if you should buy or lease your car and what portion of those costs you can use for your deduction calculation, keep in mind that the final tax write off will be limited to the business use of the vehicle versus the personal use. If you use your car 80% of the time for business, only 80% of your monthly lease payments or your annual depreciation plus interest is deductible for tax purposes.
Information on Tax Deductions for Cars
For more information on allowable deductions and your small business tax requirements, check out Gabrielle’s Tax Tips from an Accountant , run monthly in the Small Business BC Education Centre.