Buy Vehicle Under Corporation’s Name Or Personally?

The most common question accountants are asked by the corporation owners is whether to buy vehicles under the corporation’s name or personal name. As a business owner, you are always looking to maximize your tax deductions.  

Vehicle expense is most closely looked at by the CRA in the corporate tax return, even though it should be the most straightforward category of expense. 

The tax law allows you to deduct vehicle-related expenses; however, when the vehicle is used for both personal and business usage, things become more complicated. This article will explore the tax implications of owning passenger vehicles under a corporation name vs personal. However, before that, we need to understand how the Income Tax Act (ITA) and the CRA broadly classify vehicles into two categories, i.e. passenger vehicles and motor vehicles. 

• A motor vehicle is an automotive vehicle designed or adapted for use on highways and streets. A motor vehicle does not include a trolley bus or a vehicle designed or adapted to be operated only on rails.
• A passenger vehicle is a motor vehicle that is owned by the taxpayer (other than a zero-emission vehicle), or that is leased and 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.

Source CRA Website 

This classification makes a massive difference in many cases for the following reasons.

• In the case of a “motor vehicle” such as a truck, trolley, etc. the CRA will not doubt that someone uses it for personal purposes. Accordingly, its use is subject to less scrutiny.
• “Passenger vehicles” and zero-emission passenger vehicles are subject to limits on the amount of capital cost allowance (CCA), interest, and leasing costs that may be deducted.
• The CRA reviews “passenger vehicles” more closely since the owner-manager does not deal at arm’s length with the company. Businesses typically purchase these cars, which owners then use for personal enjoyment. From the CRA’s perspective, this means owners are using corporate profit for personal use without paying taxes. 

Now, let’s discuss the implications of owning the passenger vehicle in the corporation’s name vs. the shareholder’s.

Tax Implications if the Vehicle is Owned by the Corporation 

If the corporation owns the vehicle, the corporation can claim its depreciation (capital cost allowance) and operating expenses such as gas, repairs, license fees, insurance, etc. Where the business use of vehicle is over 90%, it will allow the business to claim all expenses as business expenses. Meanwhile, when the business use is less than 10%, the business will not be allowed to claim any expense.  If a car is used 100% for business purposes, then there is no need to keep separate kilometre log and expense records.

In most cases, businesses find themselves somewhere between the aforementioned scenarios and are required to allocate vehicle-related expenses between business and personal uses based on the actual distance travelled. In such cases, besides receipts of the expenses, CRA would need the detailed travel log to justify the business kilometre. For business owners who have only one vehicle available to them, CRA’s scrutiny level will be much higher. When a car is parked at the owner’s residence during non-business hours, it is deemed to be available for personal use. 

When a shareholder uses a company-owned car, two benefits are included in their personal income: Standby benefits and Operating benefits.

Standby Benefits:

These benefits are included in the shareholder’s income at 2% of the original cost of the vehicle or 2/3 of the monthly lease payment for each month the car was available for personal use. These benefits are taxable on the shareholder’s T4 slips unless reimbursed by the employee for personal use.

Operating Benefits:

If the company covers the operating costs of the vehicle (such as gas, insurance, maintenance, etc.), the shareholder is assumed to have received a benefit from the corporation’s assets. An operating cost benefit is included in the employee’s personal income/T4 unless reimbursed by the employee.

A reduction in both benefits (standby charge and operating benefits) is possible if the personal use of vehicles is less than 50%. 

Painful Aspect of Corporation’s Owned Vehicle

• Standby benefits are based on the original cost of the vehicle. For instance, if your company buys a car for $100,000 and you use it for personal purposes, the standby benefit will be calculated at 2% per month, totalling 24% for the year, equating to $24,000. Even as the car depreciates over time, for example, after five years, with a market value of $50,000 (half the original cost), the standby charge will still be based on the original price of the vehicle, i.e., $100,000, not the current market value.

• While shareholders’ benefits are calculated based on the original cost of the vehicle ($100,000 in our example), the corporation can claim a Capital Cost Allowance (CCA) or depreciation, which is limited to the maximum limit set by the CRA for the passenger CRA ($37,000 before tax for 2024 and $36,000 before tax for 2023).

Why is Tracking Personal Kilometres Important? 

Tracking personal kilometres is essential for determining the percentage of the vehicle’s use for personal purposes, which is crucial for tax purposes. To accurately calculate personal kilometres and differentiate them from business kilometres, it’s necessary to maintain a detailed log of all trips. This log should include the date, destination or distance travelled, and the purpose of each trip. According to the CRA:

• Driving from home to work and work to home is considered personal travel.
• If you stop somewhere to meet a business client while travelling from home to the office, it is considered a business trip, as is the return journey.

For business owners using vehicles for both personal and business purposes, providing evidence of how the vehicle is allocated for use is crucial when dealing with the CRA. Claiming 100% business usage may necessitate even more thorough evidence, such as demonstrating that the vehicle is parked at the business location during off-business hours.

Tax Implications if the Vehicle is Owned by the Shareholder:

If the shareholder owns the vehicle, vehicle expenses can still be claimed by the corporation. Your accountant will calculate the portion of the vehicle’s cost allocated to the business based on the percentage of business usage. You can then receive reimbursement from the corporation for this allocated cost tax-free. The benefit is that you can use the car for personal purposes without any additional income being included in your personal income.

However, it’s essential to track all expenses and mileage to accurately allocate costs between business and personal usage. 

Non-taxable Allowances by the Corporation for Using a Shareholder’s Vehicle:

Alternatively, the corporation can provide a non-taxable allowance to the shareholder for the use of personal vehicle. If the allowance is reasonable and based on actual mileage (at the prescribed CRA rate), it is not considered a taxable benefit. The advantage of this method is that shareholders do not need to track expenses; only mileage needs to be recorded.

If the allowance is not based on actual mileage or the CRA-prescribed rate, it may be considered unreasonable and included in the shareholder’s income. However, you can still claim reasonable expenses based on the kilometres driven.

CRA’s prescribed reasonable allowance rates for 2024, they are:

• 70¢ per kilometre for the first 5,000 kilometres driven
• 64¢ per kilometre driven after that.

In the Northwest Territories, Yukon, and Nunavut, there is an additional 4¢ per kilometre allowed for travel.

Automobile Deduction Limits and Expense Benefit Rates for Businesses

As per the news release of the Department of Finance Canada, Ottawa, Ontario December 18, 2023, The following changes to limits and rates will take effect as of January 1, 2024:

• The ceiling for capital cost allowances (CCA) for Class 10.1 passenger vehicles will increase to $37,000 from $36,000, before tax, in respect of new and used vehicles acquired on or after January 1, 2024.
• The limit on deductible leasing costs will be increased to $1,050 from $950 per month, before tax, for new leases entered into on or after January 1, 2024.
• The maximum allowable interest deduction will be increased to $350 from $300 per month for new automobile loans entered into on or after January 1, 2024.
• In provinces, the limit on the deduction of tax-exempt allowances paid by employers to employees who use their personal vehicle for business purposes will increase by two cents, to 70 cents per kilometre, for the first 5,000 kilometres driven, and to 64 cents for each additional kilometre. For the territories, the limit will also increase by two cents, to 74 cents per kilometre, for the first 5,000 kilometres driven, and to 68 cents for each additional kilometre.
• The CCA ceiling for Class 54 zero-emission passenger vehicles ($61,000 before tax for new and used vehicles) will remain the same for 2024, as this limit continues to be appropriate.
• The general prescribed rate used to determine the taxable benefit of employees relating to the personal portion of automobile expenses paid by their employers will remain at 33 cents per kilometre for 2024. 
• For people who are employed principally in selling or leasing automobiles, the rate used to determine the employee’s taxable benefit will remain the same, at 30 cents per kilometre for 2024. 

Source: Department of Finance Canada

Recommendation: 

In light of the above discussion, if a corporation-owned car is used 50% or more for personal purposes, the ITA prescribed formula mandates a significant benefit to be included in the shareholder’s personal income. The CRA’s stringent requirement aims to ensure that business-owned cars are primarily used for business purposes.

In such circumstances, it is typcically advisable that the vehicle is owned in the personal name of the shareholder rather than by the corporation. This arrangement can help mitigate tax implications associated with personal use of corporate asset while ensuring compliance with CRA regulations.

Note that there may be special rules that apply to your specific situation. It’s advisable to consult a Source Accounting tax advisor for further information or assistance. Our experts can provide tailored advice based on your individual circumstances and ensure compliance with relevant regulations.

Source Accounting Professional Corporation (CPA) is a full-service accounting firm in Mississauga, dedicated to individuals, small and medium-sized businesses, providing tax preparation, corporate tax filing, accounting, bookkeeping services, payroll solutions, etc. If you are looking for an accountant Mississauga (Brampton, Toronto, GTA) or an accountancy firm Brampton, you are in the right place.

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.