The focus of this article is to consider whether a “motor vehicle” purchased by a corporation is considered an “automobile”. For income tax purposes these two terms represent important distinctions which I will address.
There is no restriction on the amount of depreciation that can be deducted on a “motor vehicle”. On the other hand depreciation that can be deducted on an “automobile” is restricted to the lesser of its cost and $30,000. For example only $30,000 of a $50,000 pickup truck can be written off over time if it is considered an “automobile”. In addition, the mandatory calculation of a “standby charge” (a taxable benefit) to an employee or shareholder who has personal use of a vehicle is not required if it is not considered an automobile.
So how do you determine the difference? For purposes of the Income Tax Act an automobile is a motor vehicle that is designed or adapted mainly to carry individuals on highways and streets, and has a seating capacity of not more than the driver and eight passengers. Essentially all passenger cars, vans, sport utilities, and pickup trucks sold at a typical dealership are considered an automobile - unless certain exceptions apply.
One exception is a van, pick-up truck or similar vehicle that can seat no more than the driver and two passengers, and is used primarily (50% of the time) to transport goods or equipment in the course of business, in the year it is acquired or leased. If this condition is met the vehicle is not considered an automobile. An example might be a pickup truck or van (that can only seat the driver and two passengers) used at least 50% of the time by a construction company to deliver tools and supplies to job sites.
Another exception is a van or pick-up truck that can seat more than three people but is used 90% or more of the time to transport goods, equipment, or passengers in the course of business. That’s right. If the pickup truck is an extended cab that can seat more than three people it must be used 90% or more of the time by that same construction company to be considered a motor vehicle and not an automobile.
Let’s consider an example of how this might apply to our construction company.
Assume the company purchases a $50,000 extended cab pickup truck that seats the driver and four passengers and is used 75% of the time to transport tools and supplies to a job site. In this instance the truck would not meet the first exception because it seats more than the driver and two passengers. It would not meet the second exception because it was not used 90% of the time to transport goods, equipment, or passengers in the course of the business income earning activities.
If that truck was not an extended cab and could only seat the driver and two passengers the full $50,000 could be depreciated because it would meet the first exception. If on the other hand our extended cab truck was used 90% or more for transporting tools and supplies the full $50,000 could be depreciated.
This is a simplistic overview of the rules and other exceptions and consequences that need to be considered can apply. In reality business owners may require a certain level of seating and have a specific use for a vehicle that do not allow them to plan around the tax implications. The important thing is that you seek the right advice before making a purchase and that it is reported correctly after the purchase.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.