As a sole proprietorship, you may find the need to acquire a car which will help simplify certain business operations. The tax rules for leasing or buying a car for business can be somewhat complex which is why we always advise you to hire a tax expert who will help elaborate your options.

Buying a Company Car

One of the first options most corporations have is buying a vehicle under their name. To start with, you must ensure that the vehicle’s title has the company’s legal name and not your personal name. Additionally, ensure that the car’s price doesn’t exceed $30,000 if you want to get the most tax benefit. If you buy a company car that is more expensive than this then it will not be allowed to depreciate more than $30,000 + HST. Since the car can be depreciated at 30% every year, you can also get an expense deduction on your income statement while applying the half rule.

How About Vehicle Expenses?

When the company buys a car under its name, it now owns the vehicle which means that all the expenses will be paid by the corporation itself and not its employees or shareholders. Expenses to be paid by the company after buying a car include:

  • 1. Repair and maintenance costs
  • 2. Car insurance
  • 3. Car registration fees
  • 4. Fuel
  • 5. Parking fees etc.

If an audit is conducted, you must present receipts of the said expenses otherwise the deductions can be denied. If the car is used for both personal and business reasons then the expenses will not be deducted in full. You must also have a vehicle log book which will provide information such as the kilometers or milesdrivenwith the company car for business and personal purposes. This log book is a very important document if you face an audit. The calculated amounts obtained from the kilometers driven for personal use will be included in your personal tax return as income.

Leasing a Company Car

Have you considered leasing a company vehicle? One major difference between leasing and buying a company car is that, when you decide to lease then the car is not depreciated since you are not paying a lump sum purchase price. Also, you cannot exceed a lease payment of $800 plus HST per month. If the car price is more than $30,000 + HST it can still be leased but at the end of each year, you will take a non-deductible portion of the lease payment for tax purposes.

How to Determine Which Option is For You

One thing you need to do is to determine how many kilometers your vehicle is likely to be driven for business purposes. Will the car be used for at least 50% for business purposes? If this is the case, it would be better to lease or purchase the vehicle for your company. If you don’t expect to use the car often for business then consider the option of a tax-free car allowance. Buying or leasing a car can help you minimize taxes but you have to carefully analyze your options to determine which is best for you.