Today’s blog will discuss leasing vs. buying a car under your corporation. You can also use this as a guide for your sole proprietorship business as the tax concepts for leasing vs. buying a car are very similar
1. Buying a Company Vehicle:
In leasing vs. buying a car, the first option is purchasing a vehicle under your corporation; you need to begin by making sure when you purchase the vehicle the corporation’s legal name is on title of the vehicle, it should not be under your personal name. One of the basic tax rules is making sure the vehicle price does not exceed $30,000 plus HST for tax purposes to maximize the benefit fully. If the vehicle price exceeds this amount, you will not be allowed to depreciate more than $30,000 + HST.
If a vehicle is purchased for a list price of $50,000 plus HST, the corporation will be allowed to fully depreciate up to $30,000 + HST for tax purposes. The extra $20,000 can still be paid by the corporation; however, it will not be tax deductible for tax purposes.
A vehicle can be depreciated at 30% each year, this means you will have an expense deduction on your income statement equal to thirty percent of the purchase cost of the vehicle. Keep in mind, in the first year a special tax rule called the half your rule applies.
An important accounting control to remember is that now that the company owns the vehicle, it will pay for all the expenses directly itself not the shareholders or employees using it. These expenses can include vehicle insurance, registration fees, repairs and maintenance, fuel, parking fees and toll routes etc. In the event of an audit you MUST have a logbook; otherwise, the auditor can rightfully deny the deduction altogether. The log book contains all the kilometers driven with the company car both personal and business. At the end of the year a standby charge and operating cost benefit calculation is done by your tax accountant in Brampton. These calculated amounts represent all the personal kilometers driven with the company vehicle and will be included in your personal tax return as income.
2. Leasing a Company Vehicle:
In buying vs. leasing a car, the second option is leasing a vehicle under your corporation. Leasing a vehicle has the same similar rules for purchasing a vehicle under the corporation–except for the following three differences:
- The vehicle is not depreciated since you’re paying monthly lease payments and not one lump sum purchase price.
- The maximum lease payment cannot exceed $800 plus HST per month.
- If the vehicle price exceeds 30,000 + HST it can still be leased by the corporation; however, at the end of the year a non-deductible portion of lease payments calculation is required to be done by your tax accountant in Brampton.
The non-deductible portion of lease payment calculation will take the portion exceeding $30,000 and prorate the maximum deductible portion of lease payments from $800 plus HST to a lower amount. The corporation will still be allowed to pay the full lease payment even if it’s exceeding $800 plus HST; however, the maximum deductible amount for tax purposes will be reduced accordingly.
Now that we know the differences and tax rules for both options, you can determine which option is best for your circumstance using the guideline below.
- Determine your vehicle usage for business purposes in kilometers so you can use a rough estimate to get some percentages to work with.
- Will be using your vehicle for at least 50% or more of the time for business purposes?
- As a general guideline, if yes, it can be advantageous to lease or purchase a vehicle under your corporation.
- If no, you should consider the tax-free car allowance as an option. Click to learn more about this option https://www.youtube.com/watch?v=0W8TtCCsPF0
In conclusion, buying vs. leasing a car under a business has many benefits that will help minimize your taxes. By carefully analyzing your situation with a tax accountant in Brampton, you can determine which option is optimal for you. Speak with one of our tax accountants today!
Author: Gurrai Birdi, CPA, CGA, MBA
Gurrai Birdi is a Chartered Professional Accountant (CPA, CGA, MBA) who has years of extensive experience in public practice working with highly satisfied individual and business clients to ensure there taxes are minimized and accounting needs are fulfilled.