Many pharmacy owners ask us about whether it is better to buy a motor vehicle under the business or personal name. While having a company vehicle owned by your corporation may offer certain benefits, whether or not it provides savings for you depends on your circumstances.
Impact of Personal Use
When you buy or lease your vehicle through your corporation, your pharmacy can claim tax deductions for the vehicle operating costs as well as the purchase or lease costs. However, there are maximum amounts for these deductions.
However, most pharmacy owners have significant personal use of the vehicle. Personal use is a taxable benefit which is included in your employment income. This reduces any benefit of corporate ownership.
Company Vehicle Standby Charges Benefit
If a vehicle is owned or leased by your corporation, but is also used for personal purposes, then a standby charge applies and is a taxable benefit to you. As a result, you pay personal tax on the personal use portion.
The standby charge is based on the number of days that it is available to you, and is calculated as a percentage of the full capital cost or lease cost of the vehicle. The charge may be reduced if it is used more than 50% of the time for business use and personal kilometres are below a certain amount.
In our opinion, if you do not drive at least 90% or more for business, this standby charge can become more of a tax burden than a tax benefit.
Company Vehicle Operating Cost Benefit
If a vehicle’s operating expenses are paid by your corporation, but the vehicle is also used for personal purposes, then an operating cost benefit applies and is a taxable benefit to you. As a result, you pay personal tax on the personal use portion.
Operating expenses include all day-to-day expenses to maintain your vehicle, such as gas, maintenance, insurance, car washes, winter tires, and so on.
The operating cost benefit is based on the kilometers driven for personal use, and can be reduced if you use over 50% of the time for business use.
In our opinion, if you do not drive at least 90% or more for business, this operating cost benefit can become more of a tax burden than a tax benefit.
Is It Worth a Pharmacy Owner Buying a Vehicle Under the Business Name?
There are a few considerations to ask yourself before buying a vehicle through your corporation. You need to know how much of the vehicle use will be for work purposes only, and calculate the impacts on your personal taxes, once the total taxable benefit of having a business vehicle available for your personal use has been factored in.
Some questions to ask yourself before buying are below.
What Is the Percentage It Will Be Driven for Personal Use?
For most pharmacy owners, if you will use the car for business less than 90% of the time, it is most likely better to buy the car personally. Going through the business can be more complicated, and the standby charges compared against personal tax benefits are likely not worth it.
If you have another vehicle that you use for all of your personal household driving, this may make buying a car under corporate ownership a better consideration, but you need to ensure that 100% of the driving is for-work related purposes.
Most pharmacy owners drive less than the 90% threshold and use their vehicles for both business and personal use. However, there are some pharmacists who cater to retirement or long-term care homes, or have other similar situations, who may drive more than this for business purposes. In these rare cases, it may be worth buying a business-specific vehicle that is used 100% for work, to service these clients.
It’s important to make sure you are calculating your percentages right, and including the right trips for business or personal use. The CRA considers driving from your home to work as personal travel, but if you add a pit stop for business purposes, then the entire drive can be classified as business.
For example: driving from home to a patient’s home to drop off a script and back home, driving from home to a patient and then to the pharmacy, or from the pharmacy to a patient and then home are all considered work related.
You can use apps that will track every trip for you automatically and is a lot easier to calculate the percentages of business vs personal use.
Can Your Business Get Financing?
Another significant consideration is whether your pharmacy business can get financing. Many dealerships avoid lending to businesses, and if your pharmacy business is new, you’ll have an even harder time getting financing.
If you are able to get financing, compare the interest rate to what rate you would pay if you purchased the car personally.
For many, it’s more feasible to buy a car personally.
What Are The Commercial Insurance Rates?
Before buying a vehicle through your business, compare auto insurance quotes. A business-owned vehicle is considered commercial for insurance purposes, instead of personal, and usually has higher premiums.
Are You Leasing or Buying?
Whether you are interested in buying or leasing a vehicle impacts what may be the best strategy. If you buy a vehicle under the business, and then sell the car in the future,you need to calculate and factor in depreciation recapture and capital gain impacts if the car sells at a profit.
However, if you lease or personally buy a vehicle, you don’t need to worry about these factors.
Capital Cost Allowance (CCA)
If you purchase a vehicle, you can claim a percentage of the vehicle’s depreciation value that is related to your work. Most motor vehicles used by pharmacy business professionals will fall under CCA class 10 or class 10.1. A passenger vehicle purchased in 2023 with a price of up to $36,000 before sales tax falls under this category. Over this, it will fall under class 10.1. With these classes, a CCA of 30% can generally be claimed.
A zero-emission passenger vehicle, purchased after March 18, 2019 may fall under class 54, and you can claim a higher CCA amount of up to 100%, or $61,000.
When selling, there may be a gain or loss, depending on whether it sells for more or less than its remaining balance.
If you lease a vehicle, you claim a percentage of the monthly lease cost that is related to your work. Lease payments up to the first $36,000, plus GST/HST/PST of a car bought in 2023 can be claimed. The monthly lease limit is $950, plus GST/HST/PST.
What Is the Car Value?
The value of the car is a consideration. If you buy, the CCA write-off for 2023 is $36,000 for a regular car or up to $61,000 for a zero emission vehicle. If you lease it, there is a maximum of $950 per month typically.
You cannot claim additional tax deductions for more expensive cars, for any value that is higher than these maximums.
Estimate the Impacts
The Canada Revenue Agency (CRA) has a calculator to estimate your taxable benefits. You will need to have all of the vehicle costs, expenses, and mileage information. Also, check the CRA Requirements to make sure you meet them.
You Can Still Claim Auto Expenses on a Personal Vehicle
If you decide to purchase a vehicle personally, car expenses can still be claimed in your corporation.
The amount of the allowable car expenses follows all the principles we already mentioned, as a percentage of the cost of the vehicle and all its operating expenses.
The good thing is, if you buy the car personally, you do not have to worry about any of the standby charges, operating cost benefits, depreciation recapture, capital gain, etc. in the future.
At tax time, your accountant will calculate the allowable auto expense to claim in your business and then you can take out this money tax free from your corporation.
For example, let’s say the allowable auto expenses for the year ends up being $5,000 for the year. Your corporation will claim $5,000 as a tax deduction on its corporate tax return, saving you money in taxes, and then you can withdraw $5,000 tax free from your corporation to you personally, to reimburse you for these costs you paid for during the year.
To learn more about how you still claim these expenses, checkout our blog post:
Get Professional Advice
Pharma Tax offers professional, pharmacy-focused business planning services, and can provide individual, tailored advice on business decisions like buying a vehicle through the business. Decisions like this impact both your pharmacy business and personal taxes, but we have the expertise to factor both sides in.