Treatment of a purchased or leased vehicle for tax and HST Input Tax Credit (ITC) is not always straight forward. To determine the tax deductibility and applicable ITC, a business should first determine the type of vehicle. The Canada Revenue Agency (CRA) defines two types of vehicles: motor vehicles and passenger vehicles. The tax and HST ITC treatment of motor vehicles are more advantageous for businesses. If the type of vehicle is considered to be a passenger vehicle, there will be limitations on Capital Cost Allowance (CCA), interest, leasing costs, as well as applicable HST ITC.
In the case of motor vehicles used all or substantially all (90% or more) for commercial activities, the tax treatment is simple. All expenses are deductible and the business is entitled to full HST ITC. If the business use is less than 90%, the deductibility and entitlement for HST ITC will be prorated according to the percentage used for commercial activities.
In the case of passenger vehicles, the following limitations should be noted:
- Maximum cost to be added to the CCA class is $30,000. This amount will be amortized at 30% annually except for the first year, in which the amortization rate will be 15%.
- Maximum interest expense is limited to $10 per day.
- Deduction limit for leasing is $800 per month. Additional annual limitations will be imposed based on:
- Total lease cost limit of $30,000 for the life of the lease; and
- Manufacturer’s list price.
- The above limits for CCA, interest and lease expenses will be further reduced according to the percentage of use in commercial activities.
- GST Memorandum 8-2 sets the following limits for claiming HST ITC for a purchased passenger vehicle:
ITC entitlement on passenger vehicles and aircraft
|% of use in commercial activities||General registrants (corporations) and public service bodies||GST/HST registered individuals and partnerships||Financial institutions|
|≤ 10%||No ITC||No ITC||ITC = actual % of use|
|> 10% up to 50%||No ITC||CCA based ITC||ITC = actual % of use|
|>50% and < 90%||Full ITC||CCA based ITC||ITC = actual % of use|
|≥ 90%||Full ITC||Full ITC||ITC = actual % of use|
Corporations can claim the full HST ITC if the passenger vehicle is used primarily (over 50%) for commercial activities. However, it cannot exceed the HST on the $30,000 cost limit. The ITC is claimed in the GST/HST return for the period in which the vehicle was acquired.
Individuals and partnerships must amortize the HST ITC based on the CCA rate depicted above with consideration to the percentage of use in commercial activities unless the percentage is 90% or more, in which case the full HST ITC will be claimed. For instance if a vehicle is purchased for $40,000 plus 13% HST ($5,200), the HST ITC will be calculated as below:
First year: $30,000 x 13% x 15% = $585
Assume 80% commercial use: $585 x 80% = $468
Second year: (($30,000 x 13%) – $585) x 30% = $994.50
Assume 75% commercial use: $994.50 x 75% = $745.87
- HST ITC on leased passenger vehicles is limited to the HST paid or payable on the maximum tax deductible lease expenses. For instance, if a business spends $10,000 for leasing a passenger vehicle in a year and the tax deductible leasing expenses are calculated to be $7,000, the HST ITC to be claimed for the year will be the HST on $7,000. If the HST rate is 13%, this amount will be $910.
When a vehicle is provided to an employee or a person related to the employee, the employee will be considered to receive two benefits:
- Standby charge benefit – By virtue of a vehicle being available to an employee, this benefit will be arisen.
- Operating expense benefit – Payments for operating expenses related to personal use is a benefit to the employee.
The sum of the above benefits must be reported on the employee’s T4 slip.
The CRA has an automobile benefits online calculator to calculate the above benefits. Please note that the employer must also remit HST in respect of these benefits.