Vehicles – Is it Better to Own Inside or Outside of a Company?
Before we can understand if it is better to own a vehicle inside or outside of a company, we first need to look at the rules regarding company owned vehicles.
The Canada Revenue Agency (CRA) breaks down vehicles into 2 categories – motor vehicles and passenger vehicles. Motor vehicles do not have cost limitations and are not subject to the same rules as passenger vehicles. Passenger vehicles have cost limitations and can have significant tax consequences for the shareholder(s).
TYPES OF VEHICLES
A coupe, sedan, station wagon, sports car, or luxury car is always a passenger vehicle.
A pickup truck or van used to transport goods or equipment in the course of business seating 1 to 3 people (including the driver) is considered a motor vehicle if in the year of purchase or lease it is used more than 50% of the time for business use.
A pickup truck with extended cab, SUV or van used to transport goods, equipment, or passengers in the course of business seating 4 to 9 people is considered a motor vehicle if in the year of purchase or lease it is used 90% or more of the time for business use.
All other vehicles not mentioned are considered a passenger vehicle.
A key detail with the designation of a vehicle as a passenger or a motor vehicle is that it is determined in the year of purchase. For example, if an extended cab truck is purchased on the last month of the fiscal year and is used that day 90% or more for business it will be considered a motor vehicle regardless of whether it is used 90% or more for business thereafter.
There may be a change in use if the business usage changes significantly in a future year which could affect the ability to claim a vehicle as either a passenger vehicle or motor vehicle. Contact your trusted advisor if this is the case to discuss.
Rules for Passenger Vehicles
As mentioned, if a vehicle is considered a passenger vehicle, there are limitations that are placed on it. Note that motor vehicles do not have these limitations. Limitations on passenger vehicles include:
- A maximum deduction allowed for interest on a loan to purchase a passenger vehicle is $300 per month.
- A maximum deduction allowed for monthly lease costs per passenger vehicle is $900 in 2022 (increasing to $950 in 2023) plus GST or HST and any applicable PST, less any GST or HST input tax credits claimed. The deductible lease costs are prorated if the value of the vehicle exceeds the capital cost limit of $34,000 in 2022 (increasing to $36,000 in 2023).
- A maximum cost amount for capital cost allowance (CCA) purposes is $30,000 plus taxes less input tax credits. If you pay more than this, your CCA claim will still be based on only $30,000 plus taxes, less input tax credits.
- A standby charge will be charged to the shareholder(s). The standby charge will be 2% of the original cost of the vehicle multiplied by the number of months the vehicle is available use for an owned vehicle. Simplified, if the vehicle is available for use throughout the year, this will be 24% of the original cost of the vehicle. If leased, the standby charge is 2/3 the monthly lease costs multiplied by the number of months available in the year. A reduction is available if the personal use is less than 50% for both owned and leased vehicles.
- An operating benefit could be charged to the shareholder. If the company pays for only the company related expenses, the operating benefit could be waived. The cost of the operating benefit is currently $0.33 per kilometer for 2023. A reduction is available if the personal use is less than 50% for both owned and leased vehicles.
The standby charge and operating benefit can have a significant impact on the shareholders’ loan balance in the company. These taxable benefits will have to be repaid or will reduce the shareholders’ loan balance.
As you can see, there can be a significant restriction on the CCA on passenger vehicles as new SUV’s and extended cab trucks can cost well in excess of $34,000 in 2022 (increasing to $36,000 in 2023). There is also the large annual taxable benefit to the shareholder(s) with the standby charge and operating benefit. These factors make it very costly to own a passenger vehicle inside of a company.
If the vehicle is owned in the company, it is also important to maintain a log book tracking the personal and business use of the vehicle. This is to help support the business use of the vehicle should CRA ever question it.
If a vehicle will be used in the business and will be considered a motor vehicle, it should be owned by the company.
If a vehicle will be used in the business and will be considered a passenger vehicle, it should not be owned by the company. Rather, it should be owned by the shareholder(s) and a business use of the vehicle should be charged to the company. If funds are required out of the company to purchase the vehicle, this can be achieved with a variety of methods, each of which will likely be more beneficial than having the company own the vehicle.
Conrad earned a Bachelor of Science degree in Business Administration with a concentration in Finance from Winthrop University (South Carolina, USA) in 2004. He began working for Peters and Loeppky, Chartered Accountants in May of 2005 and moved over to Stark and Marsh in 2008 when the two firms merged.
In 2009, he decided to pursue his CPA, CA designation, through the legacy CA program, which required a few course upgrades followed by completion of the CASB (Chartered Accountant School of Business) program which he successfully completed in 2014. In September of 2014, he wrote and passed the UFE (Uniform Final Exam) which is the last step to becoming a CPA, CA, and in January 2019 attained his Certified Valuation Analyst (CVA) certification. In January 2022, Conrad became an Associate Partner with Stark & Marsh.
Conrad’s experience is mainly in corporate year ends, corporate tax, personal tax, and farm programs. He is also working in the valuation department.