We had been helping many real estate agents setup corporations in the past few months.
Many of them are high income earner, high commission income with little deductions.
One thing we suggested to those who are interested in buying a new car is to purchase an zero emission vehicle.
(As a disclaimer, I am not a big proponent to buy a car to get deduction. But if you are required to buy a new car anyway, you may as well take advantage of this deduction.)
A zero emission vehicle, if purchased before 2024, allows the taxpayer to get a bigger deduction than buying a regular car.
Of course, this includes Tesla as well. 😊
Many of these top producers decided to get a new car so that they can get a bigger write off the year they purchase the vehicle.
And here’s how it works:
If you drive a car to earn business income or property income, you’re eligible to deduct the business use of the vehicle expense.
Typically speaking, when you purchase any vehicle, you can claim the annual wear and tear of the purchase price of the car (up to a maximum of $30K plus HST).
The annual wear and tear deduction is called capital cost allowance in tax terms.
The annual rate of deduction is usually 30% on passenger vehicles, exception applies to first year of deduction.
You may spend $22K on a used vehicle, CRA would take the $22K as the starting point of the CCA calculation.
You may spend $60,000 on a new Lexus, CRA would only count $30K plus HST as the starting point of the CCA calculation.
Using an example to illustrate, you purchased a $60K new Lexus in 2021 and you only drove 80% of the time for business purpose:
1st year deduction = $30,000 x 1.13 x 30% x 80% = $8,136
2nd year deduction – you start with the amount that has not been depreciated first and apply the 30% rate decided by CRA = ($33,900 – $30,000 x 1.13 x 30%) x 30% x 80% = $5,695
Year 3, 4, 5, 6…and so on…are all the same… amount of deduction is gradually going down every year.
Now… when you buy a zero-emission vehicle after March 18, 2019, and you DON’T take any government rebate, you will get bigger deduction. Here’re the difference.
Maximum capital cost is increased from $30K + HST to $55K plus HST to start off.
And…the capital cost allowance that you can claim annually is…wait for it… 100% for vehicles acquired after March 18, 2019 and before 2024.
Instead of buying a Lexus, you’re buying a Tesla Model 3. This is an emission free vehicle, and again, you use the vehicle 80% of the time to earn business income.
1st year deduction = $55,000 x 1.13 x 100% x 80% = $49,720
That’s it. No year 2, no year 3, no year 4 deduction. Done and over with!
This can be translated to an immediate tax benefit in year 1 of $20,792! (assuming you’re 50% marginal tax rate)
Of course, there’s some other impact when you eventually sell the car, that’s a topic of another day!
Now, when you are off to shop for your next car this year, maybe there’s just a bigger incentive for you to pick a zero-emission car over a regular car!
Make sure you consult with a qualified accountant before you start shopping!
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant