In 2019, I bought a car for personal use. In 2020, I started a business and added it to my tax return as class 10 using a FMV of $25,000. The CCA was calculated as:
25,000 x 30% x 0.5 (half year rule) = $3750, but since my business use was only 40%, the max CCA I could claim is $3750 x 0.4 = $1500. This would normally leave a UCC of $23,500.
However, the business had a loss in 2020 so I chose not to claim any CCA. This now means that my UCC at the start of 2021 is 25,000.
In 2021 business use on the car was about 50% but the car was traded in for $20,000 (the vehicle purchased falls into class 10.1) so while working on my taxes for this year, I entered this as a disposition in Area D of my T2125. This has now lead to a terminal loss of $5,000 ($25,000 UCC - $20,000 proceeds of disposition).
This terminal loss comes off my business income, but it seems like I’m missing something because this calculation seems to make an assumption that the entire vehicle was used for business which is not the case.
Am I doing something wrong or did I mess a step somewhere?
I believe you cannot have a terminal loss on sale or trade-in on class 10 or 10.1 vehicles, which I do understand may be bad news for you but at least takes care of the terminal loss issue.
Thank you for that information. My only concern is that the link you provided is for line 22900 on the T1 form which relates to employment expenses (expenses incurred while employed by a company). I should have been more clear, but I’m self employed so this information is going on a T2125 form.
You need to complete motor vehicle worksheet in your T1 and pro-rate (miles used) the business and personal use of vehicle. Also remember to recapture any CCA when calculating your gain/loss on sale of the asset.
You should treat the 2 vehicles separately. 10 and 10.1 are two different classes of assets, they should be treated differently. In your situation, there should:
I appreciate everyone’s input so far, but please understand the issue is with the resulting class 10 TERMINAL LOSS. I know about pro-rating business vs personal use and the fact that the sold car is in different asset class (class 10) than the purchased car (class 10.1). In fact, if the cars were both in the same class, this whole scenario would be a non-issue.
The numbers are telling me there is a terminal loss of $5000 (since the last asset in class 10 is gone and there is still a UCC balance). The vehicle has never been used solely for business purposes…there has always been some personal use. Can I claim the entire amount (100%) of the loss against my business income even though the vehicle use is NOT used 100% for business?
The purpose of pro-ration is to identify the eligible business portion of the expenses/losses/gains from an asset. Technically if your business had a zero use of the vehicle, which was registered privately under your name, then there isn’t any loss to recognize under the business.
No, you cannot. If you have the vehicle recorded on the T2125 CCA schedule, TaxCycle may be applying the terminal loss as 100% business use, but (as you seem to understand the ITA) you should not be doing that. Calculate your business % and override TaxCycle’s calculation.
Since the business use isn’t identical each year, how do I come up with the business use % for the terminal loss? Is it an average of the last two years?
Good question. Not sure if CRA has a policy or position on that, but I would think:
It’s small enough amount that CRA is not likely to question it.
If they do question it, CRA would probably accept any reasonable calculation (such as the average of the two years).
Also a good idea to document your reasoning, and keep that on file (for example, in a memo attached to that field in TaxCycle), so you can prove you thought about it, and calculated it prior to filing.