Motor Vehicle

 
 
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 As a general principle, a farmer can deduct the proportion of automobile expenses that represent business use of the automobile. However, complex rules exist where the vehicle is a type other than a “normal” half-ton truck used primarily for transportation of goods and equipment (e.g. an extended-cab truck). These types of vehicles are referred to as passenger vehicles. Vehicles such as a van or an extended-cab truck can be excluded from the passenger vehicle restrictions if certain conditions apply (see Tips and Traps below).
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Passenger Vehicles
Limits have been placed on the deductibility of automobile expenses for tax purposes. The objective of these limits is to restrict the deductibility of automobile expenses for higher priced cars, specifically automobiles costing more than $30,000.
Automobile costs can be divided into two components: the capital cost and the operating cost of a car.
The capital cost of a passenger vehicle is set at a maximum of $30,000 for the purpose of claiming capital cost allowance. The $30,000 limit represents the full cost of the vehicle excluding Goods and Services Tax (GST). Any other additions to the car, such as a roof rack, should not be included in the cost of the car.
Each passenger vehicle costing more than $30,000 (before GST) must be put in a separate class (Class 10.1). The amount added to the capital cost allowance pool is limited to $30,000 plus the related GST calculation on the maximum amount of $30,000 so that the capital cost allowance claim (30 per cent declining balance, capital cost allowance claim in the year of acquisition) is computed on this base. Vehicles costing less than $30,000 are included in Class 10.
When the Class 10.1 automobile is sold, the proceeds will be used to reduce the pool balance. A terminal loss cannot be claimed if the proceeds are less than the remaining pool balance. If the proceeds are greater than the pool balance, there is no recapture included in income. In the year of disposition, a taxpayer is permitted to claim one half of the normal capital cost allowance if the car was used to earn income at the end of the immediately preceding taxation year.

Leasing
Even if a car is leased instead of purchased, the deductibility of the lease payment is limited. The deductibility of the lease is limited to the lessor of
A. the actual lease payment,
B. $800 per month or
C. the actual payment times 30,000 divided by 85 per cent of the vehicle cost.
There are also provisions to reduce the deductible lease payments further for interest earned on refundable lease deposits and reimbursements.

Tips and Traps

  • In summary, if the automobile is a passenger vehicle (a vehicle that carries passengers in excess of the driver and two other passengers), the amount of the purchase price which can be added to the capital cost allowance pool is restricted to $30,000. This does not include regular half-ton trucks as long as the truck is used primarily (more than 50 per cent) for the transportation of goods or equipment in the course of gaining or producing income.
  • An extended-cab truck is considered a passenger vehicle because of the extra seating and is, therefore, subject to the $30,000 limit. However, in the year of acquisition, where it is used more than 90 per cent of the time for the transportation of goods, equipment or passengers in the course of gaining or producing income, it may be considered a legitimate motor vehicle. The 90 per cent level of use may be difficult to establish, and a detailed log of travel and description of goods, equipment or passengers is necessary.
  • A GST registrant is entitled to a full GST input tax credit where the business use of the vehicle is greater than 90 per cent in the year of acquisition. Where business use is less than 90 per cent, the input tax credit will be pro-rated based on the percentage of business usage.
  • Where the business use is less than 90 per cent, the individual will be deemed to have paid GST equal to 5/105 of the capital cost allowance claim on the vehicle. Therefore, the individual must claim back the GST over several years as the vehicle is depreciated for tax purposes.
  • The recoverable GST is also limited for any vehicle caught under the rules that limit the capital cost allowance pool addition to $30,000. In those situations, the GST that can be claimed back is limited to the GST on the first $30,000 of cost.
For example:
  • An individual purchases an extended-cab truck for $33,600 (including GST), and the vehicle is used 50 per cent of the time for business:
GST Recoverable
Year 1
Maximum cost per Class 10 ($30,000 + GST) $31,500
CCA rate (half year rule @ 15%$4,725
Business portion @ 50%$2,362
GST recoverable – Year 1 ($2,362 x 5/105)$112
Year 2
UCC ($31,500 - 4,725 – 112) $26,663
CCA rate @ 30%$7,999
Business portion @ 50%$3,999
GST recoverable – Year 2 ($3,999 x 5/105)$190
The rules for GST on trade-ins generally require GST to be paid on only the difference between the price of a new vehicle and the trade-in value.
 
 
 
 
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For more information about the content of this document, contact Joel Bokenfohr.
This document is maintained by Nicole Halvorson.
This information published to the web on July 24, 2014.