A close friend of Erwin and I, Andy Tran of Suites Additions, stopped by last night to watch the game with us.
He told me that he’s going to buy a zero-emission car so he could write off the entire vehicle expense and do not need to pay tax for the year.
That sounds too good to be true!
When I was doing research to write the blog post for this week, this exact same topic popped up and I thought you might be interested.
If you drive a car to earn business income or property income, you’re eligible to deduct the business use of the vehicle expense.
Typically speaking, when you purchase any vehicle, you can claim the annual wear and tear of the purchase price of the car (up to a maximum of $30K plus HST).
The annual wear and tear deduction are called capital cost allowance in tax terms.
The annual rate of deduction is usually 30% on passenger vehicles, the exception applies to the first year of deduction.
You may spend $22K on a used vehicle, CRA would take the $22K as the starting point of the CCA calculation.
You may spend $60,000 on a new Lexus, CRA would only count $30K plus HST as the starting point of the CCA calculation.
Using an example to illustrate, you purchased a $60K new Lexus in 2019 and you only drove 80% of the time for business purpose:
1st year deduction = $30,000 x 1.13 x 30% x ½ (first year rule) x 80% = $4,068
2nd year deduction – you start with the amount that has not been depreciated first and apply the 30% rate decided by CRA = ($33,900 – $30,000 x 1.13 x 30% x ½) x 30% x 80% = $6,916
Year 3, 4, 5, 6…and so on…are all the same… amount of deduction is gradually going down every year.
Now… when you buy a zero-emission vehicle after March 18, 2019, you will get a bigger deduction. Here’s the difference.
Maximum capital cost is increased from $30K + HST to $55K plus HST.
And…the capital cost allowance that you can claim annually is…wait for it… 100% for vehicles acquired after March 18, 2019, and before 2024.
What?! 100%?!
Using the same $60K new Lexus mentioned above, but assuming you bought it after March 18, 2019, and this is an emission-free vehicle, and again, you use the vehicle 80% of the time to earn business income.
1st year deduction = $55,000 x 1.13 x 100% x 80% = $49,720
That’s it. No year 2, no year 3, no year 4 deduction. Done and over with!
This can be translated to an immediate tax benefit in year 1 of $22,826! (with 50% tax rate)
Of course, there’s some other impact when you eventually sell the car, that’s a topic of another day!
Now, when you are off to shop for your next car this summer, maybe there’s just a bigger incentive for you to pick a zero-emission car over a regular car!
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Wealth Hacker & Your Real Estate Accountant