We regularly receive somewhat urgent emails from our clients about a car breaking down suddenly. Someone needs to make a decision on whether to lease or buy quickly, but they want to know: what makes sense from a tax perspective?
Generally speaking, if you have a personally-owned business, or personally own two or more rental properties, you can deduct reasonable car expenses on your personal tax return. (And of course, as is the case with many tax situations, exceptions apply.) The only difference between leasing and owning your own car is the fact that with the former you can deduct lease payments and with the latter you can deduct depreciation. However with either there are two primary limitations and a variety of smaller rules and exceptions to the formulas.
- For leases, the maximum monthly deductible lease payment is $800 plus HST.
- If you own your car then you can deduct depreciation and interest on financing the acquisition. Depreciation can be claimed at the rate of 30% on the cost (up to $30,000 cost plus taxes) of your car on a declining balance basis. (That means if, on a $30,000 car you claim $9,000 in a year then you can only claim 30% of $21,000 the following year – i.e. 30% of the unclaimed portion of the cost.) However in the first year you own the car you can only claim 15%. Interest on financing the purchase of the car is deductible up to a maximum of $300 a month.
Once you have done the above calculations you then have to determine your percentage business versus personal use of the car. This is usually based on mileage driven and the tax authorities will usually want to see some kind of car log maintained in support of any deduction. So if you drive your car 20,000 km a year and 5,000 km of that is in connection with managing your rental properties or other business activities, then only 25% of the otherwise deductible above expenses can be claimed. This calculation also will apply to operating costs (e.g. gas, repairs and maintenance, insurance, etc.) The rules on operating costs are the same for leased as owned vehicles.
That is a quick overview of the tax rules. You would have to do the calculations based on your particular circumstances to determine which is better in your case, from a tax perspective.
Generally though, we say that if financing is not a factor, lease if you’d like a newer car more frequently, and buy if you will own the vehicle for a number of years.
George E. Dube, CPA, CA
Tags: automobile, car, vehicle