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Taxes Budget change could offer sizable tax savings on a new car

Perhaps you’ve heard the story of the rancher who was bragging to the farmer. “I can get in my car at six in the morning, drive for six hours, stop to have lunch, drive another six hours and I still wouldn’t have reached the end of my property,” the rancher said. The farmer simply looked at the rancher in amazement, then replied: “Yeah, I can sympathize with you. I used to have a car like that once, too.”

Have you been thinking about buying a new car? If so, the federal budget tabled this week may present an opportunity for you – particularly if you’re looking to buy an electric or hybrid vehicle. And if you use your car in your work, the tax benefits could be significant. Let me explain.

The changes

The 2019 federal budget tabled this week proposes to allow an enhanced deduction for capital cost allowance (CCA, which is depreciation for tax purposes) if a zero-emission vehicle is purchased for work purposes. The change will allow you to deduct the full cost of the vehicle, to a maximum of $55,000 plus sales taxes, in the year of purchase. This enhanced deduction will be available for vehicles purchased in 2019 through 2023 inclusive (the allowed deduction is gradually reduced after that).

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You may be thinking: “That’s all well and good, Tim, but I don’t own a business, so this won’t help me.” Not so fast. Employees who use their cars for work may also be entitled to this enhanced deduction. More on this in a minute.

To be eligible, the vehicle must be new (not used), fully electric, a plug-in hybrid (with a batter capacity of at least 15 kWh), or fully powered by hydrogen. Further, the vehicle must be a “motor vehicle” as defined in our tax law (that is, an automotive vehicle for use on streets and highways – which includes most cars). Finally, this enhanced deduction is only available in the year you purchase the vehicle.

The opportunity

To take advantage of this deduction, the vehicle will have to be used for business purposes, which generally allows you to claim various vehicle costs – including CCA. Who does this include? Three groups of people: (1) those who have a business and use their vehicle in that business, (2) a partner who uses his or her vehicle in their work for the partnership, and (3) an employee who uses their own vehicle in their work. In any case, the vehicle must be purchased, not leased (you can’t claim CCA on a leased vehicle).

Let’s see what this may look like for an employee or self-employed person who uses his or her car for work purposes.

New hybrid or electric car purchase rules

Purchase of VehiclePartially Used for Business ($)Fully Used for Business ($)
Vehicle purchase price*55,00055,000
CCA in first year (100% of cost)**55,00055,000
Business-use portion 30%100%
CCA deduction allowed in first year 16,50055,000
Sale of vehicle
Proceeds of sale later20,00020,000
Business-use portion30%100%
Taxable income (recapture)6,000 20,000

Source: Our Family Office Inc.

*Purchase price can be a maximum of $55,000 plus sales taxes; do not include sales taxes if receiving an input tax credit for those taxes.
**Enhanced CCA allowed in the first year is 100% if purchased in 2019 through 2023; 75% if purchased in 2024 or 2025; 55% if purchased in 2026 or 2027; 0% thereafter.

Consider Jane. She’s an employee who purchases a new zero-emission car in 2019 (after budget day) for a total cost of $55,000. She’s ordinarily required to work away from her employer’s place of business and is entitled to deduct vehicle costs (see my article from 2016 for these rules: tgam.ca/cardeductions).

Jane keeps a log of her kilometres driven for work, and uses her car 30 per cent of the time for business, so she’ll be able to claim 30 per cent of her vehicle costs. When it comes to CCA on her car, the budget changes will allow her to deduct the cost of her car in 2019 (the first year). In her case, the $55,000 must be prorated because only 30 per cent of her driving is for work. So, the deduction she can claim is $16,500 ($55,000 x 30 per cent). That’s a pretty sizable deduction against her employment income. If she’s in the top marginal tax bracket in Ontario, for example, that $16,500 deduction will save her $8,832 in taxes in 2019. These are big dollars.

The nuances

Keep in mind that the federal budget is not yet law. If you want the tax savings I’ve talked about here, you’d be wise to wait to purchase your new vehicle until the budget receives royal assent. Further, be aware that if you sell the car later after deducting the full cost as CCA, you’ll have to include in your income the price you receive upon selling (for example, if Jane were to sell her car for, say, $20,000 later, she’d have to include 30 per cent – her business use – in her income, or $6,000). Finally, the 2019 federal budget is also proposing a federal purchase incentive of up to $5,000 if you buy a zero-emission vehicle (program details have not yet been released). If you claim this incentive, you can’t also take advantage of these new CCA rules.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.

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