Treatment of down payment of motor vehicle

T1
1

Hi there,

would like to make sure I am in the right direction here:

Given that the taxpayer use the vehicle for business purposes:

  1. down payment on purchases/finance: We can just use the original purchase price (price before subtracting the down payment) of the vehicle and deduct the CCA, using class 10 or 10.1. (I believe I’m correct on this, if not please advise)

  2. down payment on a lease: in this situation, is it correct to say that in addition to the monthly lease payment, the down payment can be deducted over the term of the lease? Do we add the down payment to the monthly lease payment, or input as other expenses (under operating expenses)?

Thanks in advance,

2

@kytax2015

CCA refers expense due to the depreciation of a capital asset which you have either purchased or acquired through change of use from personal to business. Schedule 8 refers only to the addition of a asset for which you are on title.

How to add vehicles at capital assets varies based upon your entity (proprietor or corporation), type of vehicle, class, value, and other considerations such as GST handling.

Percentage of business use can also affect your vehicle addition calculation if less than 90% business and owned by a corporation. There are special rules for GST and payroll benefit when less than 90% business use.

Lease is not a capital addition. Instead it is an operating expense, since you are not on title.

You have the option within the lease terms to purchase the vehicle as a predetermined price or calculation.

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3

@kytax2015

Vehicle Definitions Chart
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-229-other-employment-expenses/motor-vehicle-expenses/type-vehicle-you/vehicle-definitions-chart.html

TaxTips.ca Vehicle Expense

Payroll Benefits Chart
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/benefits-allowances-chart.html

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/automobile/automobile-motor-vehicle-allowances.html

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/automobile/automobile-motor-vehicle-benefits.html

TaxTips.ca GST on Motor Vehicle

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4

Thank you dominique_dabolczi for all the useful information.

from the explanation, I am correct regarding the purchases/finance, about adding to the asset, and lease is operating expenses.

However, I read over the link, they don’t talk about the down payment treatment. Let say I lease a new car, with the following information:

term of lease: 60 months
down payment: $6000
monthly lease payment: $300

I understand I can claim the $300/month. But how can I claim the down payment? Do I add $100/month to the lease payment, so total claim $400/month under lease? Or claim the $300/month as lease payment and $100/month as other operating expenses? Because I put the down payment, the monthly payment is lower, otherwise could be like $425/month without down payment.

Any thought?
Thanks

5

You are correct the down payment (prepayment) is amortized over the period of the lease. If you are doing the books the initial payment (also could be a trade in) goes to a Prepaid Lease asset account and then expense the monthly amortized amount from that account.

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6

Thanks!!! What if it for sole proprietor?

7

@kytax2015

Lease is treated as an expense regardless of the business entity - proprietor vs corporation.

Purchase is treated as an addition to the asset account and the amortization amount is expensed.

The difference between the vehicle accounting in a proprietorship vs a corporation include:-

PRO-RATING
Proprietorship - simple %
Corporation - taxable benefit for personal use and personal stand-by charge.

<90% Business Use in Corporation

  • Taxable Benefit for personal use and for standby charge
  • GST claim impacted.
  • Generally better off to own vehicle personally.
  • Then you can either receive kms reimbursement or a T2200 and claim as T777 against payroll

This topic is covered but not clearly in my references above.

What I do to master a topic is to create sample data and work through the examples in the following areas:-

Bookkeeping - using T accounts
Bookkeeping - using double entry bookkeeping app

Excel - Capital Asset Continuity with CCA applied each year
Excel - Lease expense reconciliation

Business Tax - T2125
Corporate Tax - T2
Payroll Tax - T4

Personal Tax - T1 with reimbursement at prescribed rate
Personal Tax - T1 with T4 including taxable benefit
Personal Tax - T1 with T2200 + T777 employment expense

Then I compare each scenario for the following -
Cash flow
Taxes payable
After tax impact

This is generally a lot of work. For a complex situation which I don’t fully understand at the outset. It may take me two weeks to a month spending half a day to a day per week checking references, thinking about scenarios, running the numbers for each scenario.

I also run through my understanding of the Tax Laws, Regulations, Rulings, and Tax Court decisions which impact this topic. I look to see how this may have changed during the past 10 years or since the last major modification. I then watch the topic quarterly for the subsequent three years to make sure that I am current.

If I find the topic very confusing, then I generally find that I have either missed one or more key facts or calculations, or I have a faulty assumption which I do not recognize as faulty. I keep noodling through the topic and examples until the topic is completely familiar to me and until I can recognize the patterns and requirements quickly and easily.

A topic such as vehicle expense, vehicle capitalization, and lease expense is so pervasive in both bookkeeping and tax that you must master this however works best for you. However, in no way can you circumvent mastering this topic and still expect to produce quality bookkeeping and quality tax.

Summer and early fall is a great time of year to dedicate to filling blind spots and mastering complex topics.

Bookkeeping and tax preparation are not simple data entry jobs. A good deal of analysis, technical knowledge, and the correct application of often apparently conflicting rules need to be mastered.

Video Tax News -
5 in 55: GST/HST Traps for the Owner-Managed Business and Individual

The Canadian Payroll Association
Taxable Benefits and Allowances
Avoid government audits. Know the rules on the more than 40 common taxable benefits and allowances included in employment income, such as automobile allowances, loan and stock options, gift cards, and more. Make sure your employer is accurately withholding, remitting and complying with year-end reporting requirements.
https://www.payroll.ca/Events/Seminars/PDS/Taxable-Benefits-Allowances

Taxtips.ca
Automobile Taxable Benefits
Learn - Automobile vs Motor Vehicle
Learn - Standby Charge Benefit
Learn - Operation Cost Benefit
https://www.taxtips.ca/smallbusiness/autotaxablebenefits.htm

Taxtips - Other topics re vehicles and business

Canada Revenue Agency Resources:

T4130 Employers’ Guide Taxable Benefits and Allowances

GST/HST Memorandum 9-2 Automobile Benefits

Income Tax Folio S2-F3-C2 Employer-provided Vehicle Taken Home at Night - scroll down

Podcasts: Taxable Benefits

IT-63R5 - Benefits, Including Standby Charge for an Automobile, from the Personal Use of a Motor Vehicle Supplied by an Employer - After 1992 (Archived),

Automobile and motor vehicle benefits and allowances

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