I know we have government rebates for EVs in Canada, but do we have tax credits like they do in the United States? – Jon, Ottawa
Canada doesn’t have a tax credit for electric vehicles – but if you’re self-employed or have to use your car for your job, you could write off thousands of dollars at tax time on the purchase price of a new EV.
But that’s only if you turned down the $5,000 federal incentive when you bought the car.
“When I bought my electric car, I got $21,000 back on my tax return – including [the write-off] and the [sales tax] I paid on my car,” said Daniel Breton, chief executive officer at Electric Mobility Canada, a Montreal-based national non-profit that promotes EV ownership. “You could save a lot more than the rebate. It’s a great program and nobody seems to know about it. When I talk to manufacturers and dealers about it, they don’t have a clue.”
What’s the difference between a tax credit and a deduction, also known as a write-off? To oversimplify, tax credits reduce the income tax you owe and tax deductions reduce your taxable income. Your taxable income is used to calculate how much tax you owe – so the lower your income, the lower your taxes.
With either a credit or a deduction, you pay less at tax time.
In the United States, there’s a tax credit of up to $7,500 for EVs and a $3,750 credit on some plug-in hybrid electric vehicles (PHEVs).
In March, U.S. President Joe Biden’s administration announced new rules for its tax credits that require cars to be built in the United States, and a growing proportion of their batteries and critical minerals to be extracted or processed in the United States or one of its free-trade partners. Now, 14 of 91 EV or PHEV models for sale in the United States qualify for either the full or partial credit.
According to the Canada Revenue Agency (CRA), we don’t have an EV or PHEV tax credit in Canada. But since 2019, Canada has had a program that lets businesses write off up to the full amount of the purchase price of a new battery-electric vehicle (BEV), hydrogen fuel-cell vehicle or a PHEV with a battery capacity of at least 7 kilowatt-hours, CRA spokesperson Anne-Flore Gnamaka said in an e-mail.
For the 2022 tax year, you can claim up to $59,000 of the total purchase price. For the 2023 tax year, that will increase to $61,000.
“These measures were announced in the 2019 federal budget and are available for an eligible [zero-emissions vehicle] purchased after March 19, 2019, and before 2028,” Gnamaka said.
You can’t claim the write-off if you took the $5,000 federal EV rebate when you bought your vehicle; you must use one or the other, according to the CRA website. It also doesn’t apply to leased vehicles or used vehicles. You must have bought the vehicle new.
The CRA didn’t immediately answer specific questions about how the write-off works, who can qualify or how much money someone could save on taxes. Gnamaka did not say whether you’re allowed to take advantage of provincial incentives – which range from $4,000 in British Columbia to $7,000 in Quebec – and still claim the write-off. The rules on the CRA’s website only mention the federal incentive.
The 100-per-cent EV write-off only lasts until the end of 2023, Gnamaka said. Starting in 2024, it will drop to 75 per cent. Then, in 2026, it will drop to 55 per cent. The last year for the write-off will be 2027, Gnamaka said.
Appreciation for deprecation?
So how does the write-off work?
If you own a business or are self-employed, you can claim an income tax deduction on the depreciation of certain assets, such as a vehicle, laptop or furniture, that you’ve bought to help you earn income.
“[Normally], the asset must be written off over multiple years rather than allowing the full amount to be written off in the year of purchase,” Jami Monte, a chartered professional accountant and spokesperson for TurboTax Canada, said in an e-mail. “The amount that is eligible to be written off depends on the Capital Cost Allowance (CCA) rate provided by the CRA.”
For instance, gas-powered vehicles have a CCA rate of 30 per cent – so businesses can write off 30 per cent of the cost of the vehicle each year, except the first, when you can write off 15 per cent.
But with an EV, you can write off a lot more, Monte said.
“You’re looking at a 100-per-cent write-off in the first year of purchase for some EVs versus a 15-per-cent write-off in the year of purchase for some traditional vehicles,” Monte said. Business owners who purchase an EV for business use, freelancers who use their EV part-time for work or employees who are required to use their vehicles for work can all claim the deduction, Monte said. For an employee to claim the deduction, their employer would have to officially document that driving a vehicle is a condition of their employment, Monte said.
“[Also, both freelancers and employees] will need to prorate the write-off in accordance with the amount of kilometres that they drive for their freelance gig versus for personal use,” Monte said.
The amount you could save will vary, Monte said.
“The savings depend on when the vehicle was purchased and available for use, how often the vehicle is used for business and the business owner’s tax rate,” Monte said. “If someone [in Ontario] is a sole proprietor in the highest combined tax bracket for 2022 … and they use the vehicle 100 per cent for business use, they could claim a write-off of up to $59,000 – realizing up to $31,582.70 in tax savings.”
Before buying an EV for a business or self-employment, it’s a good idea to check with an accountant to figure out how the write-off would work, Monte said.
“When it comes to writing off vehicles, there are plenty of intricacies to consider; for example, if you sell your EV down the line, some of the tax savings that you enjoyed in the year of purchase may be recaptured by the CRA at the time of sale,” Monte said.
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Jason Tchir