When it comes to purchasing a car, two of the most common questions we hear are:
- Should I buy a car under my personal name or through a corporation?
- Is it better to lease or borrow money to acquire a vehicle?
Let’s delve into these questions to help you make a more informed decision.
Lease or Buy: Key Considerations
While many view this as an accounting question, several other factors significantly impact your decision:
- New or Used: Do you want a brand-new car, or are you happy with a vehicle a few years old?
- Current Rates: What are the current finance and lease rates?
- Mileage: How many kilometers will you drive annually?
- Longevity: Are you the type to drive the same car for 12 years, or do you prefer a new car every few years?
These questions will ultimately guide your decision on whether to lease or buy.
Tax Deductions: Mileage vs. Actual Expenses
There are two primary methods for calculating automobile expenses:
- Mileage: This often results in a higher deduction.
- Actual Expenses: This can sometimes provide a greater deduction, especially if you have an expensive lease or don’t drive much.
With the mileage rate, the deduction is the same whether you lease or buy. Your corporation can pay you a car allowance of $0.70 for the first 5,000 kilometers of business mileage and $0.64 per kilometer for the balance of business mileage in 2024.
As an alternative you can claim a percentage of your expenses using actual expenses:
- Leasing: The maximum monthly allowable lease expense is $1,050
- Purchasing: The maximum monthly allowable interest deduction is $350, and you can deduct a percentage of the vehicle’s purchase price each year due to depreciation. The maximum depreciable amount for a passenger vehicle is $37,000 and the vehicle can be depreciated at a rate of 15% in the first year and 30% of the remaining balance in subsequent years. The ceiling for zero-emission passenger vehicles is $61,000 and the vehicle can be depreciated at a rate of 30% in the first year and 30% of the remaining balance in subsequent years.
In addition to depreciation, you can deduct actual costs related to:
- Fuel
- Repairs and parts
- License and registration fees
- Insurance
- General maintenance (e.g., oil changes)
While there are differences between these methods, the bottom-line savings are usually marginal.
The Canada Revenue Agency (CRA) requires that an accurate mileage log be kept when a car is driven for both business and personal purposes. You should keep a weekly or monthly log for each vehicle indicating the total kilometers driven and the kilometers driven to earn income. Using these two figures, you can calculate the percentage that your auto is used for business purposes, thereby accurately calculating the percentage allowable as an expense.
Personal vs. Corporate Ownership
We usually recommend buying or leasing a car under your personal name and having your corporation reimburse you for its use. If the car is under a company name and you use it personally, you must:
- Reimburse the company for your personal use percentage of expenses, or
- Take a taxable benefit into your personal income.
You’ll also need to calculate a gain or loss when you sell the vehicle, resulting in more paperwork for your accountant and higher accounting fees for you. While one of the great benefits of a corporation is limited liability, owning assets through the corporation limits liability to all your assets, which defeats the purpose.
Conclusion
When making major decisions like purchasing or leasing a vehicle, we highly recommend consulting with your accountant to ensure you’re making the best choice. If you have any questions about automobile expenses or are considering leasing or purchasing a new car, please feel free to contact us. We’re here to discuss your situation and help you make the right decision for you.
