Each year in December, the Department of Finance ("Finance") announces changes to the allowable deductions for the purchase, lease, financing costs, and car allowances for the business use of vehicles as well as to the taxable benefits for the personal use of company vehicles. As the changes are effective for 2003, owner/managers should be aware of the impact of these new rates for the 2003 tax year.  

Most cars, some pick-up trucks, and vans that seat more than three but less than 10 people are considered passenger vehicles. Deductible expenses include licence and registration fees, payments for fuel, insurance, interest for financing, leasing costs, capital cost allowance (CCA), maintenance, and repairs. If you use your car for both business and personal use, the expenses are pro-rated according to your use of the vehicle for business purposes. There are further restrictions on the deductions for capital cost allowance, interest and leases for passenger vehicles owned by a company or used for business purposes.

CCA

Finance has increased the maximum cost on which capital cost allowance may be claimed for luxury automobiles with a cost of $30,000 before PST and GST/HST for cars purchased after 2002. If, for example, the provincial sales tax rate is 9%, the maximum amount on which CCA may be claimed is $34,800. If the maximum GST input tax credit (ITC) can be claimed, the maximum amount on which CCA may be claimed is $32,700.

The new amounts also apply to the maximum GST ITC that can be claimed for the purchased automobile. Thus, if the cost of the automobile is $40,000, the ITC is based on the $30,000 amount, i.e., $2,100.

Interest Deductibility

If you have borrowed money to purchase a passenger vehicle that is used for business purposes, the interest you can deduct is based on a formula using either the cash or accrual method to a certain maximum. In recognizing the costs of vehicles, Finance has maintained the maximum interest deduction of $300 per 30-day period for vehicles purchased after 2002.

Lease Deductibility

If you lease a car in 2003, the maximum monthly deduction will remain at $800 plus PST and GST/HST. The GST ITC is limited to 7% of the lease charge up to the monthly maximum of $800; i.e., the ITC maximum is $56/month.

Personal Use of Company-owned Vehicle

If you are an employee and your employer provides you with a vehicle, the taxable benefit for your personal use of the vehicle is increased from 16 cents/kilometre to 17 cents/kilometre for 2003. If you are employed principally in selling or leasing automobiles, the taxable benefit for your personal use of the vehicle is increased from 13 cents/kilometre to 14 cents/kilometre for 2003.

Employees are well advised to keep records of their personal and business use of their cars. Documentation of business trips should include the date, destination, purpose and total kilometres driven.

Employee Automobile Allowances

Employers will welcome the news that the deductions for employee automobile allowances are increased for 2003:

For the first 5,000 kilometres, the rate is increased from 41 cents to 42 cents / kilometre. Over 5,000 kilometres, the rate is increased from 35 cents to 36 cents / kilometre.

For the Yukon, Northwest Territories and Nunavut, the rate is increased from 45 cents to 46 cents/kilometre for the first 5,000 kilometres. Over 5,000 kilometres, the rate is increased from 39 cents to 40 cents/kilometre. If the employer pays more than these amounts, the employer cannot deduct the excess unless the car allowance is taxable to the employee.

Take Time to Plan

Talk to Logan Katz LLP Chartered Accountants to determine the impact of these changes on your tax planning for 2003.

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.

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