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.
Car Loans Canada
Car Loans Canada
“Depreciation” is the word used to describe the way 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 if you decide you want to sell your car 3 years after you bought it brand new, you might be surprised to find that it’s lost around 3/4 of it’s value!
The most accurate way to calculate the cost of vehicle depreciation for a fleet is by using the accelerated method. This method is so named because it recognizes the large drop in a vehicle’s value that occurs during its first year and then levels off in subsequent years.
To calculate the impact of depreciation, let’s look at an example. 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.
Here, the vehicle you originally paid $100,000 for is worth only $28,672 after five years — a loss of $71,328 or about 71% of its original value! At this point, the truck isn’t even worth 30% of its purchase price.
| Length of ownership | Depreciation rate | Yearly dollar amount of depreciation | Vehicle’s remaining value |
|---|---|---|---|
| Brand new | 0% | $0 | $100,000 |
| End of year 1 | 30% | $30,000 ($100,000 x 0.30) | $70,000 |
| End of year 2 | 20% | $14,000 ($70,000 x 0.20) | $56,000 |
| End of year 3 | 20% | $11,200 ($56,000 x 0.20) | $44,800 |
| End of year 4 | 20% | $8,960 ($44,800 x 0.20) | $35,840 |
| End of year 5 | 20% | $7,168 ($35,840 x 0.20) | $28,672 |
Every vehicle depreciates at a different rate. But, according to the Canadian Black Book, these vehicles are known to retain their value better than most.
Sub-Compact Luxury Crossover
Mercedes-Benz GLA-Class
Zero Emission Vehicle
BMW i3
Sub-Compact Crossover
Jeep Renegade
Sub-compact Car
Toyota Yaris
Compact Car
Toyota Prius V
Mid-Size Car
Toyota Camry
Full-Size Car
Toyota Avalon
Entry-Luxury-Car
Lexus CT200h
Premium Luxury Car
Porsche Panamera
Sports Car
Ford Mustang
Premium Sports Car
Chevrolet Corvette
Compact SUV
Jeep Wrangler
Mid-size Crossover-SUV
Toyota 4Runner
Full-size Crossover-SUV
Chevrolet Tahoe
Compact Luxury Crossover-SUV
Porsche Macan
Mid-size Luxury Crossover-SUV
Lexus GX460
Full-size Luxury Crossover-SUV
Mercedes-Benz G-Class
Minivan
Toyota Sienna
Compact Commercial Van
Chevrolet City Express
Full-size Vans
Mercedes-Benz Sprinter 2500
Small Pick-up
Toyota Tacoma
Full-Size Pick-up
Toyota Tundra
*To obtain these results, CanadianBlackBook.com measured 2015-model-year vehicles in 23 categories. The value of vehicles were tracked over a four-year period, with analysts scouring hundreds of thousands of sales transactions and other data points from live auctions, online auctions, dealership and other proprietary sources. Prizes were awarded to those vehicles that held the highest percentage value of their original MSRP.
Other vehicles that are known to hold their value well over time include the following:
While you can’t prevent depreciation, you can reduce the cost of depreciation on your fleet of vehicles.
Yes. The CRA allows business owners to deduct the cost of depreciation, but not the cost of purchasing vehicles.
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.
The Canada Revenue Agency often uses the terms depreciation and “Capital Cost Allowance (CCA)” interchangeably for the purpose of determining tax claim eligibility. Deductible vehicle expenses are calculated the same way for sole proprietorships, partnerships and corporations, however, each entity reports these expenses differently to the CRA.
Tax reporting for sole proprietorships and partnerships
Sole proprietorships report business vehicle depreciation on line 9936 (“Capital cost allowance (CCA)”) of Tax Form T2125 Statement of Business or Professional Activities.
Partnerships report depreciation on line 9943 (“Other amounts deductible from your share of net partnership income (loss)”) in part 6 of form T2125.
Being in a partnership does not mean you can claim more deductibles on an asset than if one person operated the same business alone. 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 amount that the CRA allows you to claim for a single vehicle’s expenses is the same regardless of whether 1 person uses that vehicle or 101 people use it.
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.
Tax reporting for corporations
Corporations report vehicle depreciation on of form T2 Corporate Income Tax Return (see Income Tax Folio S3-F4-C1 General Discussion of Capital Cost Allowance).
Calculating vehicle depreciation
Your commercial vehicle expenses claim should be based on your business year not the calendar year. You will need to calculate the capital cost of your vehicle, determine which class of depreciable property it falls under according to CRA regulations and then apply the yearly depreciation rate for that class to the vehicle’s capital cost. The result is the capital cost allowance (CCA) for that vehicle, which you can deduct from your taxes.
Talk to either a tax accountant or a tax lawyer to know exactly what you’re eligible to claim and how to go about claiming it.
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.
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