Bought a new vehicle to use in your business or thinking of buying one and wondering how to claim this on your income tax in Canada?
The cost of buying a new (or used) vehicle can’t be directly written off as a business expense.
Instead, because a vehicle is property that deteriorates over time, you need to write off the cost of your vehicle purchase through Capital Cost Allowance (CCA) over a period of several years.
If you are a sole proprietor or a member of a partnership, you will claim this CCA on line 9936 of your form T2125, Statement of Business or Professional Activities (definition).
(Canadian corporations can claim CCA on vehicles they've purchased for business use as well, of course, in the appropriate section of the T2 corporate income tax return. The calculation of CCA works exactly the same way as for sole proprietors and partners and the same CCA classes and rules apply.)
When you look at form T2125, you’ll see an Area A – Calculation of capital cost allowance (CCA) claim box at the top of page 4.
My article, How to Calculate Capital Cost Allowance, provides a detailed column-by-column explanation.
What You Need to Know Before You Calculate Your CCA
1) There are two different types of vehicle for income tax purposes, motor vehicles and passenger vehicles, and the type of vehicle you own or lease affects the amount you can deduct for Capital Cost Allowance and other expenses. The Canada Revenue Agency provides a chart of vehicle definitions for vehicles bought or leased after June 17, 1987 and used to earn business income here.
Generally, they advise, a passenger vehicle is “a motor vehicle designed or adapted primarily to carry people on highways and streets. It seats a driver and no more than eight passengers. Most cars, station wagons, vans, and some pick-up trucks are passenger vehicles”.
2) There are different classes of Capital Cost Allowance and different classes of Capital Cost Allowance have different CCA rates (rates of deduction over time).
Passenger vehicles fall into one of two CCA classes:
- Class 10, which has a CCA rate of 30% or
- Class 10.1 which also has a CCA rate of 30%. Passenger vehicles that cost more than $30,000 belong in Class 10.1.
You do not include the GST and PST, or HST, when calculating the cost of the vehicle to determine which class it’s in.
The CCA limit for vehicle cost is $30,000 so when a passenger vehicle falls into this class, you can only claim $30,000 plus the GST and PST (or HST) on $30,000 – no matter what the vehicle actually cost you.
So if you bought a new van for $42,000 to use in your business, this vehicle would be in Capital Cost Allowance Class 10.1, as it cost you more than $30,000 and you would only be able to claim a capital cost of $30,000 plus the applicable GST and PST (or HST) on $30,000.
If you bought the van in BC, for instance, where the PST rate is 7%, you would then add:
- 5% GST on $30,000 = $1,500
- 7% PST on $30,000 = $2,100
For a total capital cost of $36,600. This is the amount you would enter in column 3 of Area B on Form T2125.
3) Beware the half-year rule!
The half-year rule means that in the year that you purchased the vehicle, you can only claim a half-year of Capital Cost Allowance (50%).
In the case of the example I just gave above of buying a van to use in your business, in the tax year that I bought it I would only be able to claim $18,300.
Tax Tip: If you can, time your new vehicle purchase for the end of your business’s fiscal year. That way you get to claim the 50% of CCA for that entire tax year (even though you didn’t have the vehicle until near the end) and then get a full 100% CCA on the vehicle the next year.
- Chapter 4 of the Canada Revenue Agency’s T4002 - Business and Professional Income guide is all about Capital Cost Allowance.
- How to Calculate Capital Cost Allowance