It’s time to stop leaving money on the table. Your business vehicle isn’t just an asset; it’s a prime opportunity for tax savings. Claiming Capital Cost Allowance (CCA) for business vehicles is essential for any savvy business owner looking to maximize deductions. Before making your next big purchase, take a moment to learn the critical steps to write off your business vehicle expenses effectively.
First, there are two types of motor vehicle expenses in terms of income tax in Canada:
- Expenses related to the use of a vehicle (which you claim on line 9281 – Motor vehicle expenses)
- Expenses related to purchasing a motor vehicle (which you claim as Capital Cost Allowance)
Understanding the difference between these two categories is fundamental for accurate tax reporting and optimizing your deductions. While day-to-day operating costs fall under ‘expenses related to use,’ the larger investment in the vehicle itself is handled through CCA. Correctly classifying these allows businesses to leverage all available tax benefits.
Here, we will speak mainly about claiming CCA on a vehicle purchased for your business.
Capital Cost Allowance (CCA)
Businesses in Canada can claim the Capital Cost Allowance (CCA), a tax deduction for the cost of depreciable property used for business purposes. Depreciable properties, such as vehicles, wear out or become obsolete over time, and CCA allows you to deduct a portion of their cost each year. The amount you can deduct depends on the CCA class of the property. For most vehicles, this falls under Class 10 or Class 10.1, allowing you to claim CCA on your business car.
The difference between Class 10 and Class 10.1 is an important one. Class 10 is generally for business use vehicles, such as a delivery van, and the entire cost of the vehicle is able to be used for CCA purposes.
Class 10.1 is used for passenger vehicles that have a cost greater than $37,000 (for 2024) before any sales taxes. The eligible cost available for CCA purposes is limited to $37,000 plus sales taxes. For example, if a vehicle was purchased at a cost of $60,000 plus 13% HST, for a total cost of $67,800, but for CCA purposes, the total cost would be limited to $41,810.
To determine which class applies, you need to consider the type of vehicle purchased, its intended usage, and the extent to which that usage is related to the business. Certain vehicles, such as luxury vehicles or sports cars, will always be classified as Class 10.1, regardless of whether 100% of their usage is for business purposes.
Zero-Emission Vehicles
If you’re considering a Zero-Emission Vehicle (ZEV), it’s important to understand the specific tax incentives available. Previously, the Government of Canada offered a temporary enhanced first-year CCA rate of 100% for eligible zero-emission vehicles purchased after March 18, 2019, which applied to vehicles acquired before 2024. These vehicles typically fall under new CCA Classes 54 (for passenger vehicles) and 55 (for other ZEVs).
While the 100% deduction was temporary, ZEVs may still have beneficial CCA rates. To be eligible for these deductions, the vehicle generally must be new (not used), fully electric, a plug-in hybrid (with a battery capacity of at least 15 kWh), or fully powered by hydrogen. It must also meet the “motor vehicle” classification as defined by Canadian tax laws. There are also specific MSRP limits for eligibility: for vehicles with 6 or fewer seats, the MSRP must generally be less than $45,000 (with a sales price limit of $55,000), and for vehicles with 7 or more seats, the MSRP must be less than $55,000 (with a sales price limit of $60,000).
Always consult with your accountant to understand the most current CCA rules and incentives for zero-emission vehicles in 2025, as tax laws can change.
Employees
You may be wondering if your employees can also benefit from vehicle expense deductions. In short, yes. As long as the vehicle falls under one of these three groups regarding business use, you’re good to go:
- Business owners who use the vehicle(s) for business purposes
- If your business is structured as a partnership, your partner who uses the car for work
- An employee who uses the vehicle for work purposes only.
If an employee uses a business vehicle for personal purposes, there could be an employee benefit that would require the calculation of a Standby Charge as a taxable benefit; more on this topic in a future blog.
Spouses
If you aren’t planning on purchasing a zero-emission vehicle, in certain situations, the Canada Revenue Agency (CRA) will allow the taxpayer’s spouse to purchase the vehicle, but the taxpayer can deduct the expenses if it’s used for business purposes. The best way to understand if your unique situation would be eligible is by speaking with your accountant. They know the ins and outs of your business’s finances and should be able to recommend the right path for you.
Calculating CCA for your Business Vehicle
Sole proprietors or partnerships typically claim CCA on Line 9936 of Form T2125, Statement of Business or Professional Activities. Corporations include CCA on their T2 corporate income tax returns. While the reporting forms differ, the general principles for calculating CCA on your business vehicle are consistent across all business structures in Canada.
As mentioned earlier, vehicles fall into different CCA classes, primarily Class 10 and Class 10.1, and knowing your vehicle’s classification is crucial as it dictates the amount you can deduct. Remember, the percentage of CCA you can claim also depends on the percentage of business use of the vehicle, and personal usage of the vehicle can create taxable benefits with personal tax consequences.
The Half-Year Rule and Timing Your Purchase
When you acquire a depreciable property, such as a vehicle, for your business, the “half-year rule” generally applies. This rule states that in the year you acquire the property, you can only claim 50% of the CCA that would normally be allowed for that asset class, regardless of when in the year you made the purchase. In subsequent years, you can claim the full CCA rate for the asset class. Understanding this rule is important for tax planning, especially when considering the timing of a significant purchase in relation to your business’s fiscal year-end.
Selling the Vehicle
So you bought the vehicle, used it for a number of years and are planning to buy a new vehicle and sell the existing one. What happens then? Well, it depends.
Depending on the Undepreciated Capital Cost (UCC), the original cost less any CCA claimed to date, and the proceeds on the sale, you could be looking at a situation with either Recapture or a Terminal Loss.
Recapture arises when you sell a depreciable asset, like a vehicle, for an amount greater than the UCC. For example, the UCC of the vehicle sold is $20,000, but you sell it for $25,000. In this situation, you would have a recapture of $5,000 that would be taxable income. Taking this a step further, in the unlikely situation that the selling price is higher than the original purchase price, a capital gain would also be reported.
On the other hand, if you sell the vehicle for less than the UCC amount, you will incur a terminal loss and be subject to an additional deduction on your tax return for that amount.
As a note, vehicles that fall into the Class 10.1 group are exempt from the Recapture and Terminal Loss rules.
Who knew writing off your business vehicle expenses could include so many nuances? You can maximize the tax deductions if you have an experienced team of tax specialists and accountants on your side. At SBLR, we combine cloud-based software with the expertise of our accountants and tax professionals to bring you informed and efficient tax advice. Call us at 416-646-0550 or request a consultation to get started.