Thinking of selling or trading in a vehicle you use for business? The proceeds of a sale or trade-in figure into your capital cost allowance (CCA). Here are some things to consider.
Do you have to pay taxes when you sell a business vehicle?
If you claim motor vehicle expenses, selling a vehicle you use for work means you have to report it on your income tax return. Whether or not a sale or trade-in will increase the balance owing on your tax return depends on how much you gain from the transaction. The amount is calculated into your capital cost allowance (CCA). If you use a vehicle to help you earn income, the CRA allows you to deduct part of its cost. The deductible part is equal to the vehicle's depreciation, or the decline over time of a property's value. The amount of this decline is deductible through the capital cost allowance (CCA).
CCA key terms
The most important term to be aware of if you plan to sell or trade in your business vehicle is proceeds of disposition. To calculate CCA, it helps to know these CRA terms: Capital cost: The initial cost of the property, including any taxes and delivery fees. Depreciable property: Any property eligible for CCA. There are class categories with different CCA rates. Motor vehicles and passenger vehicles fall into Class 10 and 10.1. Fair market value: The best price you would be likely to get if you sold to a willing buyer. Proceeds of disposition: The amount you received or will receive for a sale or trade-in. This amount can also include compensation received for unexpected loss of property. Undepreciated capital cost (UCC): The balance of the capital cost still subject to depreciation.
CRA guidelines for calculating CCA
The CRA publication T4002 Self-Employed Business, Professional, Commission, Farming and Fishing Income 2017 details what you need to know about figuring out your CCA, among other things. The guide provides a reminder that capital cost allowance reflects the decline in value of a property over the years. You can initially claim CCA on a property when it becomes available for use. For tax purposes, the date on which property becomes available for use is the earliest of the following:
Date it is first used to earn income
The second tax year after the year it is acquired
The time right before you dispose of it
As soon as it becomes available and can help you earn income.
Classes of depreciable property
As mentioned above, the vehicle you use for business likely falls into CCA Class 10 or 10.1. Here are the definitions and rates for both. You need to know which class your vehicle is in because CCA for class 10 and class 10.1 are calculated differently. Motor vehicles are in class 10, while passenger vehicles can be in either class 10 or 10.1. To find out which class your passenger vehicle is in, determine the cost before GST/HST or PST. Passenger vehicles purchased on any date in 2017 costing more than $30,000 are in class 10.1. A passenger vehicle would be in class 10.1 if it met any one of the following conditions and you acquired it:
After August 31, 1989, and before January 1, 1997, for more than $24,000
Following December 31, 1996, and before January 1, 1998, for more than $25,000
After December 31, 1997, and before January 1, 2000, for more than $26,000
After December 31, 1999, and before January 1, 2001, for more than $27,000
Following December 31, 2000, for more than $30,000
Types of vehicles
Here are the CRA definitions for motor vehicles and passenger vehicles. A motor vehicle adapted for use on highways and streets. Vehicles that solely operate on rails are excluded. A passenger vehicle carries primarily people and is designed or adapted for use on highways and streets. Essentially, passenger vehicles include most cars, station wagons, vans, SUVs and light duty pick-up trucks.
Here are some examples of motor vehicles. The business use percentages only apply to the vehicle in the year it was purchased or leased.
Pick-up truck, seats 1-3, carries goods or equipment, business use more than 50%
Pick-up truck with extended cab, seats 4-9, carries goods, equipment or passengers, business use 90% or more
Sport utility vehicle, seats 4-9, carries goods, equipment or passengers, business use 90% or more
Van or minivan, seats 1-3, carries goods or equipment, business use more than 50%
Van or minivan, seats 4-9, carries goods, equipment or passengers, business use 90% or more
Passenger vehicles
Here are some examples of passenger vehicles. The business use percentages only apply to the vehicle in the year it was purchased or leased.
Coupe, sedan, station wagon, sports car, or luxury car, seats 1-9, business use 1%-100%
Pick-up truck, seats 1-3, business use 1%-100%
Pick-up truck with extended cab, seats 4-9, business use 1%-100%
Sport utility vehicle, seats 4-9, business use 1%-100%
Van or minivan, seats 1-3, business use 1%-100%
Van or minivan, seats 4-9, business use 1%-100%
What are the tax implications of selling a company car vs trading in a company car?
Regardless of the class and type of your vehicle and whether you sell or trade-in, the amounts received are reported as "Proceeds of disposition during the year." The implications on your tax return of selling and trading in your business vehicle are the same. At a car dealership, trading in reduces the sales tax on the car you intend to buy. Subsection 13(21) of the Income Tax Act defines proceeds of disposition. The amount is used to calculate CCA, as well as capital gains or losses in the sale of your vehicle. In addition to selling or trading in your vehicle, proceeds of disposition can include:
Reimbursement for stolen property
Compensation for destroyed property and any related insurance coverage payable
Restitution for property taken under statutory authority or the sale price of property sold to a person who indicated intent to take it under statutory authority
Restitution for property injuriously affected, whether lawfully or unlawfully, under statutory authority or otherwise
Amounts defined in situations covered by Section 1 of the Income Tax Act, such as disposing of and reacquiring capital property in the same year.
Employees, sole proprietors and partnerships
Employees calculate CCA on their T777 form. Sole proprietors and members of a partnership use form T2125. On form T777, required CCA information for class 10 vehicles includes:
Class number
Undepreciated capital cost at the beginning of the year. This is the balance of capital cost left over from the previous year. If claiming CCA for the first time, leave it blank. Reduce by the amount of any GST/HST rebate received during the year
Cost of acquisitions during the year
Proceeds of disposition during the year
Undepreciated capital cost after acquisitions and dispositions
Adjustments for current-year acquisitions
The base amount for capital cost allowance claim
CCA rate (30% for class 10 vehicles)
Capital cost allowance (CCA) for the year
Undepreciated capital cost at the beginning of the year.
On form T777, required CCA information for class 10.1 vehicles includes listing date acquired and cost of vehicle:
Class number
Undepreciated capital cost at the beginning of the year. Reduce by the amount of any GST/HST rebates received during the year
Cost of acquisitions during the year
Proceeds of disposition during this year
The base amount for capital cost allowance claim
CCA rate (30% for class 10.1)
Capital cost allowance (CCA) for the year
Undepreciated capital cost at the end of the year
On form T2125, CCA information includes:
Class number
Undepreciated capital cost at the start of the year
Cost of additions in the year
Proceeds of dispositions during the year
UCC after additions and dispositions
Adjustment for current-year additions. If negative, enter ‘0’
