CAPITAL COST ALLOWANCE (CCA)
Business Vehicle Purchases and Your Fiscal Year End
As a commercial vehicle specialist people are always asking me for ideas on how to save tax. Although business owners can save on income tax with some tax planning, that tax planning usually comes with significant professional fees.
No matter if your business is operating through a proprietorship, partnership or corporation, the following planning can save you money.
Capital Cost Allowance
Most businesses require vehicles in their operations, and as such, the business will usually purchase these vehicles. In some cases these vehicles, although used in the business, are not used enough to meet certain criteria for the business to claim full capital cost allowance ("CCA"). These purchases normally occur throughout the year but I believe that most business owners would time their purchases better if they were aware of the related benefits.
The tax rules restrict the capital cost allowance ("depreciation for tax purposes") that can be taken on certain vehicles. If a vehicle is designed to carry individuals and their luggage and can seat the driver and eight or less passengers and is a van, pick-up truck, or similar vehicle the CCA is restricted by forcing the taxpayer to put that vehicle into a CCA class that caps the depreciable limit at $30,000 plus applicable taxes. As most people are aware, pickup trucks can cost substantially more than $30,000, yet if the business does not meet any of the exclusions; the CCA is restricted, resulting in a larger tax bill to the business.
A van, pick-up truck, or similar vehicle including SUV's are excluded from the restrictions if they have seating for no more than the driver and two passengers and are used primarily (" more than 50%") for the transportation of goods or equipment in the course of a business or for the purpose of earning income. Also excluded are all other vehicles if in the taxation year of acquisition the vehicle is used all or substantially all ("90% or more") for the transportation of goods, equipment, or passengers in the course of gaining or producing income. There is also an exclusion for vehicles used in remote work sites.
If a business is purchasing a pick-up truck or SUV that seats more than three people, it could have the CCA restricted if that vehicle is not used more than 90% for business in the year of purchase. I would hope that at this point you can see where we are going with this planning. The rules do not say how long in the year of purchase the vehicle has to be used, only that it must be more than 90% of the time. So if a business was to purchase the non-qualifying vehicle two weeks prior to year end and only use it for business for those two weeks, in theory, the business should then not have a restriction on the CCA claim of that vehicle. I say in theory because the business should keep written records of the use for those two weeks and must ensure that their accountants are aware of the exclusion from the restriction on CCA for the vehicle.
Input Tax Credits
A side benefit of fitting under the exclusions is that the vehicle is then eligible for the full input tax credit on the GST/HST paid on the purchase otherwise the GST/HST input tax credits will also be limited.
The input tax credits from the GST/HST are counted for purposes of determining whether the vehicle is excluded for the rules but the capital cost is reduced by any tax credits received.
An Example of the Savings
I have talked about the exclusion but you probably want to know how much it could save you. Well, if a business was to purchase a $60,000 pick-up truck and not qualify for the exclusions to the restrictions, only $30,000 would be eligible for depreciation and the other $30,000 would not be available to shelter income from tax. The aggregate tax saved from the extra CCA would be approximately $4,000 for a small business corporation and up to $13,000 for an individual at the highest marginal rate. The tax savings depends on the tax rates of the business entity. The tax savings will come over a number of years as the vehicle is depreciated.
A little planning on the timing of purchasing new vehicles for the business, along with proper documentation of their use, could save a business a substantial amount of money especially if those vehicles would not otherwise meet the exclusions in a full year of use. The timing of your purchases does not require a lot of professional help to execute and so the savings have a minimal cost to the business.