If you’ve ever asked your accountants whether you should own your vehicle in your corporation, or personally, I’m betting they didn’t tell you much. They probably said, “well it depends”. If you are sick of hearing this response, then you are not alone. The good news is we can give you the answer you need.
Vehicle expense is one of the most important deductions available to small business owners. We want to narrow this topic down to the owners of private corporations in Alberta.
There are three factors that really determine how you should treat your vehicle deductions. Note your answers to these three questions:
- What's your vehicle worth today?
a.) Under 15k
b.) Over 30k
c.) Between 15k and 30k
- How many Kilometers do you drive per year?
a.) Over 25,000 km
b.) Under 10,000 km
c.) Between 10,000 km and 25,000 km
- What percentage of Kilometers driven was for business purposes?
a.) Under 50%
b.) Over 50%
c.) Pretty Much 100%
d.) Almost none
Now find your answers on the grid below to see whether you should own your vehicle personally or in your corporation:
If you can’t see your group of answers on either grid, it either means its too close to call, or you fall into a grey area, and we should probably chat about it.
Value of Vehicle:
Low Value: If your vehicle isn’t worth much, (under 15k), and is fairly cheap to operate, then it likely makes sense to own the vehicle personally and charge the corporation a $/km rate.
High Value: If your vehicle is new, or worth more than 30k, then it likely makes sense to own the vehicle in your corporation. Unless it is actually a personal vehicle and you wouldn’t feel right calling it a business vehicle.
How much do you drive?
Low: If you don’t drive all that much, it probably makes sense for your corporation to own (or lease) the vehicle.
High: If you drive a lot of kms each year, and your vehicle isn’t worth all that much, then you would probably be better off owning the vehicle personally. If the vehicle is more expensive, with high kms, then the corporation should own (or lease) it.
High or low business-use of the vehicle?
Low business-use: means less than half the kms are for business purposes. If the vehicle is low business-use, low kms and high value, it may seem as though you should own it personally, but this is one of those grey areas. In some cases, it might make financial sense to still own it in the corporation. We should chat if this is you.
High business-use: means more than half of total kms driven are for business. Unless the value of the vehicle is low, then when it falls into the "high business-use" category, the corporation should own the vehicle.
When the corporation owns the vehicle:
The corporation should pay for all of the operating expenses for the vehicle, then the personal use portion is transferred to owner’s compensation. Unless pretty much all use of the vehicle is business, you still need to keep track of the total kms driven during the year, as well as the business kms driven. If your vehicle is all business-use, you should probably have a second, personal vehicle in the household.
The easiest way to log your kms is to book oil changes at the start of every fiscal year so you can track your starting and ending kms. MileIQ is a great app for tracking the business kms.
The vehicle must be registered and insured in the corporations name. If the vehicle is financed, the financing should also be in the corporation’s name. If you lease, the lease needs to be in the corporation’s name.
When you own the vehicle personally:
You should personally be paying all the operating costs, including insurance, registration, gas, oil changes, and tires. You track all the kms driven for business purposes and charge the corporation $0.55/km for the first 5,000 km and $0.49/km for everything over 5,000 km. The corporation can pay you this amount tax-free, however, the actual expenses are not deductible.
Lease Buy-out Trick
If you lease the vehicle through the corporation and have a favourable buy-out at the end of the lease, you can choose to buy-out the vehicle personally. It might not always make sense to do this, but in certain situations, it can be quite favourable to the owner, personally.
If you are still unsure whether you should own your vehicle personally, or in your corporation, make an appointment with Curtis or myself and we can walk through your specific scenario and give you some guidance. You can also find more info on Corporate Tax Services page.
Read more about Corporate Tax topics that may be helpful to you and your small business.
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