Are you planning to purchase a new vehicle for your business soon? One of the decisions you’ll need to make is whether to register it in your personal name or under your business’s incorporated name. While the costs for both options, such as SAAQ and insurance fees, are similar, the tax implications can vary greatly. It’s important to have the right expertise to make the best decision.
When a vehicle is owned by the individual:
- The shareholder is eligible for a tax-free mileage allowance of $0.58/km, which is deductible for the corporation.
- The shareholder can receive a periodic or fixed allowance from the corporation, which is taxable income. However, the shareholder can still deduct vehicle expenses in their personal tax return.
- If the company does not reimburse the shareholder for vehicle expenses, the shareholder can still deduct these expenses in their personal tax return.
- If the company does reimburse the shareholder, the shareholder cannot deduct any expenses, but the company can deduct these expenses.
When a vehicle is owned by the company:
Personal use of the vehicle is taxable to the shareholder.
- If 50% or less of the planned kilometers are for business use: $0.28/km for personal use, plus 24% of the cost of the vehicle after taxes (calculated by number of months of use in the year).
- If 51% or more of the planned kilometers are for business use:
- Classic method: $0.28/km for personal use, plus 24% of the cost of the vehicle after taxes, calculated based on the number of personal km driven.
- Alternative method: 1.5 X 24% of the cost of the vehicle after taxes (calculated by number of months of use in the year), multiplied by the number of personal km driven.
- Both the company and shareholder can deduct direct business expenses incurred.
To make the right decision, you’ll need to gather accurate information and estimate various costs, such as the purchase price of the vehicle, expenses for operating the vehicle, and your personal and business income and taxes. Based on this information, you’ll need to do 7 calculation steps to determine the taxable and deductible amounts. You can then compare the 7 calculations to determine the one with the best effective marginal rate, keeping in mind that the decision may also impact other non-tax factors. In some cases, the decision is clear cut, such as when the planned business mileage is low, the shareholder’s income is very low, or the vehicle is costly. If you need assistance making the right decision, consider booking a consultation with us.
The 7 calculation steps to determine the taxable amounts and deductible amounts for a business vehicle are as follows:
- Calculate the shareholder’s taxable benefit: This involves determining the amount of taxable benefits that the shareholder will receive from the use of the business vehicle for personal purposes.
- Calculate the deductible expenses for the shareholder: This involves determining the amount of expenses that the shareholder can deduct on their personal tax return related to the operation of the business vehicle.
- Calculate the deductible expenses for the company: This involves determining the amount of expenses that the company can deduct related to the operation of the business vehicle.
- Determine the effective marginal rate: This involves calculating the difference between the tax rate of the company and the marginal personal tax rate of the shareholder.
- Compare the fiscal cost of taxable benefits to the shareholder: This involves comparing the amount of taxable benefits received by the shareholder to the cost of those benefits in terms of taxes.
- Compare the tax benefit of expenses borne by the shareholder: This involves comparing the amount of expenses incurred by the shareholder to the tax benefit of those expenses.
- Compare the tax cost to the corporation of the employer’s share: This involves comparing the cost to the company of reimbursing the shareholder for their expenses related to the business vehicle to the tax benefits of doing so.