Hello fellow real estate investors and small business owners,
Ever since Robin was born, we noticed that a small 4-door sedan just isn’t big enough for a family of four (including our furry baby, Jackson, a 50lb German Sheppard mixed).
We have wanted a bigger and more practical vehicle for the past year. We finally decided to lease a new 8 passenger minivan.
It’s definitely not as sexy as my original sedan.
But on the bright side, now we can go on road trips with Robin & Jackson together!
What does that mean when you lease or buy a new car to a real estate investor or a small business owner? Do they count as personal contracts?
If you purchase the minivan–
Using the 8 passenger minivan as an example, assume the purchase price is $35,000 with HST 13% = $39,550. Lease rate is 2.99% and monthly lease payment is $559 including HST.
If you purchase a passenger vehicle, the maximum amount you can capitalize and depreciate is $30,000 + HST = $33,900. Similar to all capital assets, you are allowed to deduct the capital cost allowance (CCA) on the car. The rate of deduction allowed is 30% a year (1/2 year rule applied the year of acquisition and the year of sale).
Year 1 – maximum amount you can deduct $5,085 ($33,900 * 30% * ½)
Say in 2014 you drive a total of 10,000km using this car, of which, 3,000km is incurred for the purpose of earning rental income, you are allowed to deduct $5,085 * 3,000km / 10,000km = $1,525.50.
Year 2 – maximum CCA you can deduct is $8,645 (($33,900 – $5,085) * 30%)
Say in 2015 you drive a total of 20,000km using this van, out of which 7,500km is incurred for the purpose of earning rental income, you are allowed to deduct $8,645 * 7,500km / 20,000km = $3,421.88.
If you lease the minivan –
The maximum eligible leasing cost allowed to be deducted is $800 on a monthly basis.
A complicated formula is used to determine the maximum eligible leasing cost can be deducted on an annual basis.
In our example, the maximum we can deduct for the first year is $559 per month.
Year 1 – maximum eligible leasing cost that can be deducted is $559 * 6 = $3,354
Similarly, this needs to be adjusted for the usage specifically for the purpose of earning rental income. In 2014, you are allowed to deduct $3,354 * 3,000km / 10,000km = $1,006.20
Year 2 – maximum eligible leasing cost can be deducted is $559 * 12 = $6,708
Again, adjusting for the mileage used specifically for earning rental properties, maximum amount of eligible leasing cost you are allowed to deduct is $6,708 * 7,500km / 20,000km = $2,516.
What if I use my vehicle for both my self-employed business and my rental properties?
If you are also a small business owner, you drive the same car for your self-employed business and your rental properties, you are still eligible to deduct the business portion for your self-employed business an rental portion in your rental properties.
Say in year 1, you drive 5,000km for your self-employed business and 3,000km for your rental properties.
If you purchase the minivan, you can deduct CCA for $5,085 * 5,000km / 10,000km = $2,543 for your business. You can also deduct an additional CCA for $5,085 * 3,000km / 10,000km = $1,526 for your rental properties.
Administratively, you are required to record the mileage specifically used for your business and the mileage specifically used for your rental properties separately.
What other automobile expenses can I deduct?
As an example, you can deduct the following automobile expenses –
- Fuel and oil
- License and registration
- Maintenance and repairs (such as mobile dent repair, to name one instance)
- Any other expenses that are directly related to operating your vehicle (I usually include my 407ETR bill as other expenses)
The total of these expenses are then prorated based on the business use mileage or rental use mileage for deduction purpose.
You can also deduct parking expense, but only business use and rental use parking expense are allowed to be deducted. No proration is necessary for parking expense.
Hopefully, you get a better understanding on how the automobile expenses are deducted in your personal tax return.
Until next time, happy real estate investing.
Your real estate accountant
Could it be better or easier just to charge your corp the mileage only if you do not have a new or leased car. Example – 30 kms x $0.52 / kms ( not sure if this is the maximum allowed CRA )………
Cherry Chan, the Real Estate Accountant
Yes, it will definitely be easier if you have a corporation and charge the prescribed rates allowed by CRA. Unfortunately for the investors who have no corporations, they can’t do it that way and they are required to keep track of their mileage and expenses for deductions.
Top five tax tips to minimize your 2015 personal income tax - Cherry Chan, Chartered Accountant, Your Real Estate Accountant
[…] Take a picture of your odometer For the real estate investors who incur auto expense for their rental portfolio, it is important to keep a record of your odometer reading at the end of each year. This is the basis to record how much mileage you have incurred for this year and next year. All the expenses incurred for rental portfolio are prorated over the mileage you have driven for the year. See my mileage blog post for more details. […]
What does recapture look like on writing off a vehicle for rental
Hi Shelby, thanks for being here. Unfortunately this isn’t the right platform where I would be able to advise you about your personalized situation without knowing the specifics. For any questions or consultation, please contact our office at 416-548-4228 or email us at email@example.com and we will be sure to take care of you. Thanks!
Comments are closed.