Buy or Lease a Car Through Your Business or Personally?

Should my corporation own the car or should I own it?

If the car will serve both your work and family, compare a personally owned car with a documented work-driving allowance before putting it in the corporation. A corporate purchase does not make personal driving a business expense without a tax consequence: an owner or employee may receive a taxable benefit (CRA: employer-provided automobiles).

The CRA's allowance rules apply when you use your own vehicle as an employee. If you own the corporation and work for it, first identify whether it provided a benefit for your duties or because you hold shares; each benefit needs its own review. The automobile calculations below cover employment benefits. A shareholder benefit is reported on a T4A and is not deductible as a business expense. In Quebec, an automobile benefit also goes on an RL-1: box O with code RO for a shareholder benefit, or boxes A and W for an employment benefit. Before deciding, compare the purchase or lease price, financing, insurance, fuel, expected resale value, personal-use benefit, and each person's tax position.

If I am self-employed without a corporation, how do I claim the car?

A sole proprietor claims the business share of actual vehicle expenses; paying yourself a kilometre allowance does not create an employee deduction. The CRA's motor vehicle rules use business kilometres divided by total kilometres to allocate mixed-use costs.

Keep receipts for fuel or charging, insurance, repairs, licence fees, interest or lease payments. A purchased vehicle's cost is claimed over time through capital cost allowance, subject to passenger-vehicle limits; the purchase price is not an immediate operating expense. Claim eligible business parking and supplementary business insurance separately under the CRA's rules. Whether buying or leasing costs less depends on the contract, financing, resale value and business-use share. See Capital cost allowance for the yearly CCA calculation.

How much can be deducted for a purchase or lease, and is leasing better?

Leasing is not automatically better for tax. A passenger-vehicle purchase is subject to a CCA cost ceiling, a loan has a separate interest limit, and a lease has a monthly deduction limit plus a price-based restriction; then apply the business-use rules (Finance Canada; CRA: leasing costs).

Finance announced $39,000 for vehicles acquired in the page's tax year, but the current regulation still prescribes the lower table amount. Confirm enactment before using the announced ceiling. The lease restriction is based in part on the vehicle's list price, so payments below the monthly cap are not necessarily fully deductible. GST/HST and provincial sales taxes can affect the tax calculation; a recoverable input tax credit also affects cost. Compare cash paid over the entire ownership or lease term, tax deductions when available, any taxable benefit, and the expected value when the vehicle leaves the business. The precise annual CCA claim belongs in Capital cost allowance.

What taxable benefit arises when I or my family use a company car?

When a corporation makes an automobile available for your personal driving, the usual employee benefit has a standby charge for access to the car and an operating-cost benefit if the corporation pays personal driving costs. Family access can count too (CRA: employer-provided automobiles).

For a corporation-owned car, the usual standby calculation starts with 2% of the car's original cost, including applicable sales tax, for each 30-day availability period. It uses the original cost rather than the CCA ceiling. For a leased car, the usual calculation starts with two-thirds of the monthly lease cost, including applicable taxes and prorated down payments. If the corporation pays operating costs, the general fixed-rate benefit is $0.34 for each personal kilometre (CRA: calculation steps).

A car kept at home can remain available for personal driving even on days it is unused. A car returned to the business, used only for duties, and unavailable for personal trips can avoid the benefit. If the car is provided because you are a shareholder rather than an employee, the shareholder-benefit rules require a separate review.

For an employment benefit, the corporation reports it on a T4 by the last day of February after the calendar year, or the next business day if that day falls on a weekend, and withholds income tax and CPP; the same slip deadline applies to the shareholder-benefit T4A above (CRA: taxable benefits; CRA: slip deadlines). A director can become personally liable for unpaid income-tax withholding under Income Tax Act section 227.1 and unremitted net GST/HST under Excise Tax Act section 323. Both require failed collection or a claim proved within six months after the relevant liquidation, dissolution or bankruptcy event, and allow a due-diligence defence. An income-tax recovery action or GST/HST assessment must start within two years after the person ceases to be a director.

Can heavy business use or repayment reduce the benefit?

For an employee automobile benefit, heavy business use can reduce the standby charge if the conditions below are met. Assess a shareholder-capacity benefit separately. A reduced standby charge requires that the employee be required to use the car for work, drive more than 50% of its distance for work, and stay within 1,667 personal kilometres per 30-day availability period (CRA: reduced standby conditions).

Payments to the corporation for access reduce the employee standby charge only if paid during the employee's calendar tax year. Repayment of all personal operating costs within 45 days after that year ends can eliminate the operating-cost benefit; partial repayment reduces it (Income Tax Act, section 6). If the car is used mainly for employment, the employee can instead elect an optional operating-benefit calculation, but must notify the corporation in writing before the employee's calendar tax year ends. Paying for fuel alone does not remove the standby charge (CRA: repayment and optional method).

Can my corporation pay a tax-free kilometre allowance for my own car?

Yes, if you use your own car in your duties as an employee, the allowance is based only on recorded work kilometres, the rate is reasonable, and the corporation does not also repay the same vehicle costs. Separate repayment of supplementary business insurance, tolls or ferry charges can be allowed under the CRA's conditions.

These prescribed rates are generally accepted as reasonable, but a different rate depends on the facts. A flat monthly amount, an unsupported trip claim, or a second repayment for the same use can make the allowance taxable. The company should retain the employee's trip claim and log. For other costs you paid personally, see Business expenses paid personally. Whether money owed to you should instead be recorded as a shareholder loan is covered in Shareholder loans.

What driving records count, and is commuting business driving?

Keep a trip log, odometer readings and receipts. For each work trip, record its date, destination, purpose and kilometres; record the odometer at the start and end of the year and when vehicles change (CRA: motor vehicle records).

For an employee-owner, travel between home and a regular workplace is generally personal, even when that workplace is a client's site visited regularly. A client stop that is not a regular workplace can be a point of call; direct travel from home may count as work driving when reasonable for the duties and timing. Travel between work locations during the day can count as work driving. Classify each trip before using it for an allowance or company-car benefit (CRA: driving examples).

Do an electric car or pickup change the passenger-vehicle limits?

A qualifying zero-emission passenger vehicle has its own purchase ceiling, but it still faces rules for personal use and deductible costs. An electric badge alone does not remove the passenger-vehicle rules; a leased vehicle that would otherwise qualify for the zero-emission class remains subject to passenger-vehicle lease restrictions (CRA: vehicle definitions).

A pickup is not automatically outside the passenger-vehicle limits. The CRA's classification depends on seating and what the vehicle actually transports in the year acquired or leased. For example, a pickup seating the driver and up to two passengers can be excluded if used more than 50% to carry goods or equipment to earn income; larger seating configurations generally face a stricter 90% test for carrying goods, equipment or passengers (CRA: vehicle definition chart). Keep records of both vehicle configuration and use. If the pickup is a motor vehicle but not an automobile for income tax, the standard standby and operating-cost formulas do not apply. Personal driving can still create a taxable benefit based on reasonable value; the CRA has a limited home-at-night method (CRA: employer-provided motor vehicles).

Can the business recover GST/HST on a car it buys or leases?

A GST/HST registrant may claim input tax credits for eligible commercial use, subject to passenger-vehicle cost limits. The result differs for a corporation and a sole proprietor and between a purchase, lease and operating costs (CRA: ITC eligibility chart).

A registered corporation may also claim an ITC on a reasonable allowance for an employee's work driving in their own car in Canada, if the allowance is deductible and the driving supports commercial activities (CRA: ITCs on allowances). Commercial use is a GST/HST concept and is not always identical to the income-tax business-use share. For a taxable employee or shareholder car benefit, GST/HST may deem personal use commercial, though ITC restrictions can still apply. A taxable benefit can also create GST/HST for the corporation to report: an employee benefit is deemed collected on the last day of February after the employee's calendar year, while a shareholder benefit is deemed collected on the last day of the corporation's tax year. Include it in the GST/HST return for that reporting period (Excise Tax Act, section 173; CRA: GST/HST automobile benefits). See Filing GST/HST and claiming input tax credits for the invoice and return steps. Quebec QST and other provincial vehicle taxes require separate checks.

For a leased passenger vehicle not used primarily in commercial activities, a corporation can elect to forgo vehicle ITCs and the GST/HST remittance on its taxable automobile benefit. The corporation or its authorized signer completes Form GST30, effective from the first day of an eligible GST/HST reporting period, and keeps it rather than sending it to the CRA. A later change in commercial use can also trigger a GST/HST adjustment (CRA: change in use).

What happens when the corporation sells or transfers the car to me?

A sale ends the corporation's ownership, but can change its CCA claim, create a gain, and require GST/HST. See Capital cost allowance for the disposition calculation (CRA: T2 guide).

Class 10.1 passenger vehicles usually have no CCA recapture or terminal loss on sale, but recapture can apply if the car was ever designated immediate expensing property (CRA: T2 guide).

If the corporation transfers the car to you for less than fair market value, section 69 of the Income Tax Act can deem the corporation to have received fair-market-value proceeds, and the difference can be a shareholder benefit. For a taxable non-arm's-length transfer, section 155 of the Excise Tax Act may also deem fair-market-value GST/HST consideration if you are not a registrant acquiring the car exclusively for commercial activities; statutory exceptions apply. A registered seller generally charges GST/HST on a vehicle sale, with place-of-supply and provincial registration rules that need checking (CRA: GST/HST and motor vehicles). Keep a dated independent value and sale records before transferring the car.

If the corporation transfers the car to you below fair market value, Income Tax Act section 160 and Excise Tax Act section 325 can also make you liable for its income-tax and GST/HST debts for the transfer year or earlier periods, subject to the value shortfall and statutory limits. Tax need not already have been assessed; anti-avoidance rules can reach later debts. The CRA can assess you at any time. For a Quebec retail sale of a registered motor vehicle, QST is generally based on the higher sale price or estimated value. The seller must document the QST payable and the buyer generally pays it to the SAAQ on registration; an incorrect QST amount can leave the seller liable for uncollected QST plus a 15% penalty (Revenu Québec: used road vehicle sale).

Example

Illustrative Canadian dollars. An employee-owner drives 20,000 kilometres in the year: 8,000 for work and 12,000 personally. If they own the car and their corporation pays a reasonable allowance at C$0.73 for the first 5,000 work kilometres and C$0.67 for the next 3,000, the allowance is C$5,660. It can be non-taxable to the employee if the allowance rules are met.

Now suppose the corporation owns a car costing C$50,000 including sales tax, makes it available all year, pays personal operating costs, and receives no repayment. Assuming the employee benefit rules apply, the usual standby charge is C$50,000 × 24% = C$12,000 (CRA: full-year standby method). The operating-cost benefit is 12,000 personal kilometres × C$0.34 = C$4,080. The total taxable benefit is C$16,080 of income, not a C$16,080 tax bill. Work driving is 40% of the total, so the reduced standby charge does not apply. Compare the corporation's after-tax car cost, the owner's tax on any benefit, GST/HST, financing, and resale before choosing ownership.

Different for you?

• You want the yearly CCA amount or disposition calculation: see Capital cost allowance.
• The company owes you for other personal payments: see Business expenses paid personally; for an owner balance, see Shareholder loans.
• You need the GST/HST invoice and return steps: see Filing GST/HST and claiming input tax credits.
• You are an owner-employee, the car stays at home, or you plan to transfer it to yourself: the benefit, deduction and sale value need a facts-based review. Bring the purchase and lease quotes, financing, expected resale value, trip log, payroll role, GST/HST registration and province to Corporate tax.