Commercial vehicle depreciation

Understanding how vehicle depreciation works can help you reduce its effect on your fleet, calculate your annual expenses more accurately and save you money in the long run.

How does commercial vehicle depreciation work?

“Depreciation” is the word used to describe how something loses value over time – in this case, vehicles. Commercial vehicles tend to depreciate faster than personal vehicles because they’re used more heavily. Most new cars lose about 10% percent of their value as soon as they’re driven off the lot. They lose another 10-20% more by the end of the 1st year and about 25% every year after that. So you might be surprised to learn that after 3 years your car has lost around 3/4 of it’s value!

Commercial vehicle depreciation rate

The most accurate way to take into account vehicle depreciation rate for a commercial fleet is by using the accelerated method. This method factors in the large drop in a vehicle’s value during its first year before leveling off in subsequent years.

As an example depreciation calculation, let’s say you buy a commercial truck for your business for $100,000. Assume that its value will depreciate 30% after the first year and 20% each year after that. After 5 years, the vehicle you originally paid $100,000 for is worth only $28,672 — a loss of $71,328 or about 71% of its original value!

• Graphic
• Table

How to calculate vehicle depreciation for taxes in Canada?

The Canada Revenue Agency (CRA) allows business owners to deduct the cost of vehicle depreciation when filing their taxes. Keep in mind that you cannot deduct the cost of purchasing your business vehicle – instead you can only deduct the amount it has depreciated since you bought it.

CCA is the amount you can claim on the cost of your business vehicle’s depreciation. The CCA is based on the capital cost, which is the amount you paid for your vehicle.

How to calculate vehicle depreciation for taxes in 5 steps

Your commercial vehicle expenses claim should be based on your business year not the calendar year. To calculate your commercial vehicle’s depreciation, otherwise known as CCA, you’ll need to:

1. Calculate the capital cost of your vehicle, which will likely be the price you payed for it before taxes.
2. Determine what type of vehicle it is according to CRA definitions. Your vehicle will be categorized as a motor, passenger, zero-emission passenger vehicle (ZEPV) or zero-emission vehicle (ZEV).
3. Determine which class of depreciable property it falls under according to CRA regulations. Most commercial vehicles fall under Class 10 or 10.1.
4. Apply the yearly depreciation rate for that class to the vehicle’s capital cost. If your vehicle is classified as Class 10 or 10.1, that CCA depreciation rate is 30%.
5. The result is the capital cost allowance for that vehicle, which you can then deduct from your taxes.

How to report commercial vehicle deprecation on tax forms in Canada

Deductible vehicle expenses are calculated the same way for sole proprietorships, partnerships and corporations, however, each entity reports these expenses differently to the CRA.

If your making a claim in a partnership, understand that the sum of vehicle expenses – depreciation as well as other eligible costs – collectively claimed by all partners in a partnership must equal what a single individual would claim for the same vehicle(s). In other words, the total amount that the CRA allows you to claim for a single vehicle’s expenses is the same regardless of whether 1 person or 50 different people use that vehicle.

Sole proprietors and business partners can use Chart A (“Motor vehicle expenses”) of form T2125 to calculate the amount of vehicle expenses that can be claimed on their tax returns.

How do I claim a vehicle used for both personal and business reasons?

If you use your vehicle for both personal and business use, you can only claim expenses related to your use of the vehicle for business purposes.

Say, for example, you drive your car 40 km during a work day, but 15 km of that is spent running personal errands and the remaining 25 km is spent attending business meetings and picking up office supplies. In this case, you can only claim vehicle expenses associated with 25km of driving. It’s very important, therefore, to keep track of how you use your vehicle so that you can easily separate which costs are deductible and which are not.

Which vehicles hold their value best?

Every vehicle depreciates at a different rate. But, according to the Canadian Black Book, the vehicles in the table below are known to retain their value better than most.

The best compact commercial van to retain its value is the Chevrolet City Express.

How do I limit commercial vehicle depreciation?

While you can’t prevent depreciation, you can reduce the cost of depreciation on your fleet of vehicles.

• Lease. Because you don’t own the vehicle, you won’t have to worry about depreciation reducing its value. The CRA also allows you to deduct lease payments for commercial vehicles from your income, so that’s huge plus. (Note: there are some limitations to lease payment deductions depending on the class of the vehicle. See our FAQ below for more info.) Additionally, if the resale value at the end of the lease is higher than the end-of-term purchase price in your contract, you can purchase the vehicle and potentially resell it for a profit.
• Maintenance. Preventative and routine maintenance can help your vehicles retain more value, especially if you have the service records to prove it.
• Replacement cycle. Aim to replace your vehicles with newer models when the market value of those vehicles is greater than the cost of operating them.
• Buy used. Because vehicles depreciate most in the first year, consider buying a used vehicle to cut depreciation costs. Vehicles that are 1 or 2 years old still have much of their functional value but have already suffered the steepest bulk of depreciation, leaving you with an almost-new car that you can buy at a much-lower-than-new price.
• Avoid customization. Try to avoid customization or modifications that can increase the cost but not the resale value. This could include aftermarket parts, engine modifications and so on.
• Employee purchase program. Consider letting employees buy vehicles approaching the end of their useful life. They can buy used fleet vehicles at a lower rate than they might find at a retailer, and you’ll earn more than you would if you sold the vehicles to a wholesaler.
• Timing. Monitor market data to find out when prices and demand are high for vehicles you’re looking to upgrade.
• Limit suppliers. The more vehicles you purchase from a supplier, the more bargaining power you tend to have.

Ready to buy a commercial vehicle?

Whether you’re purchasing your first business vehicle or adding to your fleet, finding the right commercial vehicle car loan can help you get the right vehicle for your needs and save money. Compare commercial car loan options in the table below based on features like credit score, loan term and basic requirements.

Bottom line

Vehicle depreciation is an unavoidable expense that can soak up a large chunk of your operating costs. While you aren’t able to avoid depreciation, you can take advantage of tax benefits and other tactics to limit the cost and impact on your fleet.

Find the best way to finance your fleet and talk with a tax specialist to find out how deductions can help you reduce the burden of vehicle depreciation.

Frequently asked questions about commercial vehicle depreciation

• How can I manage the vehicle depreciation in my entire fleet?

  Consider implementing a fleet management system to optimize your fleet and reduce operating expenses like depreciation.

• When can I begin to calculate deductible expenses on my business vehicle?

  You can begin to calculate capital cost allowance (CCA) for vehicles whenever you first begin using the vehicle for income or alternatively, at “the time the property [vehicle] is delivered or made available to you and is capable of producing a saleable product or service.” See this page on the Government of Canada’s website to find out how to calculate the deduction for capital cost allowance (CCA).

• Does depreciation affect cash flow?

  No. While depreciation is generally the largest cost of owning a vehicle, it’s not something you will physically need to pay.

  Instead, your vehicle drops in value each year, which adds to the cost of replacing the vehicle sometime in the future when its value is zero and it’s no longer usable. You may need to set aside money equal to depreciation in order to pay for a new vehicle when the time comes, but this is just preparing for the future. Depreciation itself is not an expense you have to pay to anyone.

• If I lease a business vehicle instead of buying it, can I still claim it as a business expense on my taxes?

  Yes. Vehicle lease payments are tax deductible for businesses. However, there may be limits to the amount you can claim depending on the class that your vehicle falls into as defined by CRA regulations.

  If you own a vehicle, on the other hand, you can deduct capital cost allowance (depreciation) as well as interest payments if the car was financed.

  Click here to learn more about how leased vehicles affect your business taxes.

• What other commercial vehicle expenses can I deduct from my taxes?

  Besides capital cost allowance (depreciation) and leasing costs, CRA rules allow you to deduct the following expenses from your business taxes:

  • fuel (gas, propane, oil)
  • maintenance and repairs
  • insurance
  • license and registration fees
  • eligible interest on loans to finance the vehicle(s)

  Click here for more information.

Picture: Shutterstock