The Canada Revenue Agency (CRA) recently announced increases to both the cost of certain vehicles that can be depreciated for tax purposes, and the expense reimbursement limits. These rules apply if you use your car in your business, if your business provides a car to employees for their use, or if you are required to use your own vehicle for employment purposes.
When these rules apply, you can deduct the cost of your car under the tax depreciation rules, known as capital cost allowance (CCA). In addition, if you pay your employees mileage for the use of their vehicle for work purposes, there is a limit to the amount that you can reimburse those expenses and still be able to deduct the full reimbursement as an expense.
Depreciable amount for certain types of vehicles and situations
The Income Tax Act (the Act) restricts the amount of depreciation that can be claimed if the vehicle cost exceeds a certain amount. For the first time in more than 20 years, the cost of a vehicle on which CCA can be claimed has increased from $30,000 to $34,000. This increased limit includes both new and used vehicles purchased on or after January 1, 2022 and applies to the cost of the vehicle before applicable sales taxes.
The Act differentiates between passenger vehicles and other vehicles that may be used in a business. For example, taxis are not covered under this rule, nor are pick-up trucks that are used primarily to transport goods or equipment as part of your regular business. For these types of vehicles, there are no limits on what you can deduct for tax purposes.
A different limit applies to “zero-emission passenger vehicles”—a plug-in hybrid with battery capacity of at least 7kWh or is fully electric or fully powered by hydrogen. When this new category of depreciable vehicles was introduced for vehicles in 2019, a depreciable limit was set at $55,000. This limit has increased to $59,000 for zero-emission passenger vehicles purchased on or after January 1, 2022. In addition to having a higher depreciation limit—which reflects the generally higher cost for these vehicles—zero-emission passenger vehicles purchased after March 18, 2019 and before 2024 are allowed full write-off in the year of purchase. If you are an individual who uses the vehicle partially for business or employment, the write-off will be restricted to a proportion that relates to the business use of your vehicle. For further information about automobiles used by individuals for business or employment, please see our Tax Bulletin Automobile Expenses and Recordkeeping.
Where businesses or individuals lease a passenger-vehicle for use in their business or for employment purposes, the Act restricts the monthly lease cost that can be claimed as a business expense. In conjunction with the increase in the depreciation cap, the monthly lease deduction has increased from $800 per month to $900 per month for leases entered into on or after January 1, 2022.
The Act also restricts interest costs that are deductible on loans to finance a passenger vehicle that costs more that the limits noted above. The interest deduction is $300 per month and, as prevailing interest rates remain low, there has been no change in this amount.
Expense reimbursement limits
For amounts paid to employees for the use of their vehicle for work purposes, the limit on deductible expenses is determined by the number of kilometres reimbursed and whether the distance is driven in the Northwest Territories, Yukon, or Nunavut. The top rate to be paid in 2022 for the first 5,000 kilometres is $0.61 per km and $0.55 for each additional kilometre. If the distance is driven in any of the three territories, the top rate to be paid for the first 5,000 kilometres is $0.65 per km and $0.59 for each additional kilometre.
How BDO can help
When you have questions about changes in the tax rules, our BDO tax professionals can help you to understand what is best for your business.