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Planning to Purchase Vehicle under Business? Read This Before You Do!
By Wajahat Ajmal
Table of Contents
As a business owner in Canada, deciding whether to buy or lease a vehicle under your corporation can be complex and requires thoughtful analysis. In this blog, I’ll break down the differences between leasing and purchasing a vehicle for your business to help you make an informed choice. We’ll explore key topics such as tax benefits for each option, distinguishing business use from personal use, the tax implications of personal use, required documentation for claiming vehicle expenses, and more. By the end, you’ll have the insights needed to determine the best option for your business.
All the rates and amounts shown are applicable for 2025 only.
Leasing a Company Car and its Tax Implications:
Leasing a company vehicle can be a smart tax-saving strategy, as it allows you to deduct the business-use portion of eligible leasing costs from your corporation’s taxable income. For 2025, the maximum monthly lease payment you can deduct is capped at $1,100 plus GST/HST, translating into an annual deduction of up to $13,200 before taxes. This limit applies to new leases starting January 1, 2025.
For example, if your annual lease payment is $9,000 and your business use is 70%, you can deduct up to $6,300 from the corporation’s taxable income.
According to the Canada Revenue Agency (CRA), vehicles with a manufacturer’s suggested retail price (MSRP) exceeding $37,000 before GST/HST are classified as luxury vehicles. As a result, lease payments for vehicles priced over this threshold will face a gradual reduction in deductible amounts.
By understanding these guidelines, you can better evaluate the financial benefits of leasing a vehicle for your business.
Leasing a Zero-Emission Business Use Vehicle:
Businesses can access tax incentives of up to $5,000 through the Zero-Emission Vehicles (iZEV) Program when leasing a zero-emission or electric vehicle. To qualify, the lease must exceed 12 months, and capped at an MSRP of $61,000 before tax.
If the lease term is shorter than 48 months, the incentive is prorated. For instance, a 36-month lease qualifies for 75% of the incentive, while a 48-month lease receives the full $5,000.
Eligible zero-emission passenger vehicles include plug-in hybrids with a battery capacity of at least 7 kWh and vehicles that are fully electric or fully powered by hydrogen.
Purchasing Car under a Business from Tax Perspective:
The key difference between buying and leasing a vehicle lies in how tax deductions are applied. When you purchase or finance a vehicle, the cost is deducted using Capital Cost Allowance (CCA), commonly referred to as tax depreciation. However, since leasing doesn’t grant ownership of the vehicle, businesses cannot claim CCA for leased vehicles.
Vehicles are assigned to specific CCA classes based on their purchase price. Starting in 2023, Class 10 applies to passenger vehicles costing $37,000 or less (before taxes), while Class 10.1 is for vehicles priced above $37,000. Both classes allow tax depreciation at a 30% rate.
For example, if you buy a car for $28,000 before GST/HST, it falls under Class 10, enabling a 30% tax depreciation claim on its undepreciated value each year. However, for a more expensive car costing $40,000, the vehicle is classified as Class 10.1, and the 30% tax depreciation is capped at $37,000 before taxes. In this case, tax depreciation cannot be claimed on the amount exceeding the $37,000 limit.
Additionally, if the vehicle is financed through a loan, you can deduct up to $350 per month in interest charges related to the financing payments.
Ideal Time to Purchase Vehicle
Timing is crucial when purchasing or leasing a business vehicle, as it significantly affects tax deductions. For instance, if you buy a vehicle before the fiscal year ends (e.g., December 31), you can claim the same deduction as if it were purchased at the start of the fiscal year (e.g., January 1). However, under the half-year rule, the first year’s tax deduction may be reduced by 50% when depreciating the vehicle.
If you lease a vehicle, the timing of the lease agreement also impacts deductions. Entering a lease early in the fiscal year allows more monthly payments to qualify for tax deductions, potentially increasing the overall deduction for that year. Conversely, starting a lease late in the fiscal year results in fewer payments and a smaller tax deduction for that year.
Additionally, for vehicles purchased in or after 2022, immediate expensing may apply. This allows businesses to deduct up to 100% of the vehicle’s cost in the year it is acquired if the asset was brought into use before 1st of January 2024, subject to limits like the $37,000 threshold for passenger vehicles. Immediate expensing can provide a significant tax advantage, especially when the vehicle is purchased early in the fiscal year.
However, special rules apply in case of immediate expensing such as, recapturing will most likely be triggered on a disposal. Such recapture could cause an unexpected income inclusion, because each Class 10.1 asset is included in a separate CCA pool and the cost of a new vehicle does not replenish the old pool. Moreover, if the vehicle was brought into use after 1st January 2024, normal capital allowance rules apply and you cannot expense out the 100% cost of the vehicle.
Careful timing of your vehicle purchase or lease can maximize tax benefits, so it’s essential to plan accordingly.
Purchasing a Zero-Emission Vehicle for Complete Business Use
Purchasing a zero-emission passenger vehicle (or electric car) for business qualifies for the $5,000 incentive under the Zero-Emission Vehicles (iZEV) Program. To be eligible, the Manufacturer’s Suggested Retail Price (MSRP) must be $61,000 or less.
Unlike regular gas vehicles, which qualify for Capital Cost Allowance (CCA) tax depreciation at 30%, zero-emission vehicles fall under Class 54. This class offers enhanced tax benefits, including a first-year CCA deduction of up to 100%. However, this incentive will gradually decrease, reaching 30% by 2028:
Additionally, electric vehicles allow tax depreciation on amounts up to $61,000 (before GST/HST), compared to the $37,000 limit for gas vehicles. This means electric cars generally provide higher tax deductions.
It’s important to note that businesses receiving the $5,000 iZEV incentive cannot claim the additional tax write-offs under Class 54. Companies must choose between the iZEV incentive or the enhanced tax benefits.
Monitoring Business Use vs. Personal Use
If a company vehicle is used exclusively for business purposes, all motor vehicle expenses qualify for a tax deduction.
However, for leased vehicles with personal use, only the portion of lease payments and operating expenses related to business use can be deducted.
For purchased vehicles with personal use, the Input Tax Credit (ITC) claim for GST/HST paid may be impacted. The Canada Revenue Agency (CRA) requires that the vehicle be used for commercial activities more than 50% of the time to qualify for the full ITC claim.
Accurately tracking business and personal use is essential, whether the vehicle is leased or purchased.
Examples of business use:
- Traveling from your workplace to a client’s office.
- Driving to a store to buy office supplies.
- Visiting a restaurant for a sales meeting.
Examples of personal use:
- Commuting between your home and workplace.
- Visiting a restaurant to buy food for your family.
When the Business Covers 100% of Motor Vehicle Expenses
Corporations often pay for all motor vehicle expenses, including gas, insurance, repairs, maintenance, and registration fees.
If the vehicle is used for both personal and business purposes, the personal portion of these expenses must be excluded from the company’s tax deductions. Only costs related to business use are eligible for a write-off.
To calculate the personal use portion, you need to track the kilometres driven for personal and business purposes. The percentage of personal use is determined by dividing personal kilometres by total kilometres driven.
The personal portion of these expenses is then reallocated to the shareholder loan account. This reallocation does not qualify for a deduction and may create a taxable benefit for the business owner. If the shareholder loan account shows a debit balance and isn’t repaid within one year after the fiscal year-end, the owner may face additional taxes.
For business owners receiving a salary through payroll (i.e., as employees of the corporation), the personal use portion of motor vehicle expenses could result in a taxable benefit. This amount would be added to the T4 slip, requiring the owner to pay additional personal taxes on the taxable benefit (more on this in the next section).
Taxable Benefits for Employees Using a Company Vehicle
Businesses often provide company vehicles to employees for work-related tasks. However, if the vehicle is available for personal use, a taxable benefit must be reported. This rule applies to both company-leased and company-owned vehicles.
The employee’s total taxable benefit for the vehicle is recorded on their annual T4 slip and is subject to income tax, CPP, and EI deductions. This benefit includes two components:
- Standby Charge: Reflecting the value of having the vehicle available for personal use.
- Operating Cost Benefit: Covering personal use of company-paid operating expenses, like fuel or maintenance.
Both components must be considered when calculating payroll taxes.
Standby Charge Taxable Benefit
The standby charge taxable benefit accounts for the benefit an employee receives when a company vehicle is made available for personal use throughout the year.
- For a company-purchased vehicle, the benefit is calculated as 2% of the vehicle’s cost per month.
- For a company-leased vehicle, the benefit is 2/3 of the monthly lease payment.
In both cases, the benefit is prorated based on the number of days the vehicle is available to the employee during the year.
If the employee drives more than 50% for work-related purposes and accumulates fewer than 20,004 km annually for personal use, the standby charge benefit may be reduced.
Operating Cost Benefit
The operating cost benefit reflects the value an employee receives when their employer covers the operating expenses of a vehicle made available for personal use.
This benefit is calculated by multiplying the number of personal kilometres driven during the year by the CRA’s prescribed rate. For 2025, the rate is 34 cents per kilometre.
If the employee uses the vehicle for work-related purposes more than 50% of the time, the operating cost benefit may be reduced. The reduction equals 50% of the standby charge benefit minus any reimbursements made by the employee to the employer.
Information Needed to Calculate Taxable Benefits
Calculating the taxable benefits for standby charges and operating expenses can be complex. The CRA’s automobile benefits online calculator can help estimate the taxable benefit for employees.
Key information required for the calculation includes:
- The vehicle’s purchase cost or monthly lease payment.
- The number of days the vehicle was available to the employee during the year.
- Total kilometres driven for business use.
- Total kilometres driven for personal use.
- Reimbursements made by the employee to the employer.
Record Keeping for Vehicle Expense Claims
Businesses must maintain proper documentation and track vehicle usage to claim tax write-offs. The CRA has strict requirements for proof of expenses and business use of the vehicle. A detailed logbook must include:
- The date of each business trip.
- The trip’s destination.
- The purpose of the trip (e.g., client meeting).
- Business and personal kilometres driven.
- Odometer readings at the start and end of the fiscal year.
You can use a traditional paper logbook or a mobile app to track and store this data.
Using a Personal Vehicle for Business
If owning or leasing a vehicle under the corporation isn’t feasible, using a personal vehicle for business is an option.
A vehicle allowance for out-of-pocket expenses related to business use may be considered taxable income unless:
- The allowance matches the CRA’s prescribed per-kilometre rate, and
- The individual is acting as an employee of the corporation.
For 2025, the prescribed rate is:
- 76 cents per kilometre for the first 5,000 kilometres.
- 66 cents per kilometre for distances over 5,000 kilometres.
The per-kilometre allowance is tax deductible for the corporation and tax-free for the recipient. It is not considered a taxable benefit and is exempt from CPP, EI, and income tax withholdings.
However, since the allowance is reimbursement for actual expenses, the corporation cannot provide additional reimbursement while still qualifying for the tax-free allowance.
Conclusion
Purchasing or leasing a vehicle under the corporation can be a strategic way to save on taxes and reduce the personal financial burden of owning a vehicle. Each option has its benefits, but it’s essential to consider factors like the vehicle’s purchase price, interest costs, lease terms, and the percentage of business use before deciding. Additionally, comparing regular gas vehicles with electric vehicles is crucial, as available incentives and tax deductions differ.
If you’re unsure which option suits your needs best, our team of experts is here to provide guidance and support.
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