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Commercial vehicle depreciation

Your business vehicles lose value every day. Learn what you can do to manage the costs, and how to claim that depreciation on your taxes.

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!

Length of ownershipDepreciation rateYearly dollar amount of depreciationVehicle’s remaining value
Brand new0%$0$100,000
End of year 130%$30,000 ($100,000 x 0.30)$70,000
End of year 220%$14,000 ($70,000 x 0.20)$56,000
End of year 320%$11,200 ($56,000 x 0.20)$44,800
End of year 420%$8,960 ($44,800 x 0.20)$35,840
End of year 520%$7,168 ($35,840 x 0.20)$28,672

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.

The CRA often uses the terms depreciation and capital cost allowance (CCA) interchangeably for the purpose of determining tax claim eligibility.

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.

Example: How to calculate the tax deductible depreciation on a new van

Let’s work through a CCA calculation example. Say you bought a Chevrolet Express Cargo van for your business for $40,000. According to the CRA’s definitions of types of vehicles, you’ve determined your van is a motor vehicle, which puts it under Class 10 – meaning you can deduct a rate of 30% CCA of your van’s capital cost. Since the capital cost in this case is equal to the purchase cost, the CCA can be calculated by multiplying $40,000 by 30%, giving you a deductible CCA amount of $12,000.

Keep in mind that this is just a simplified example of how to calculate your vehicle’s capital cost allowance. You usually won’t be able to deduct the full amount within the first year you purchase an asset. Because it can get more complicated depending on individual scenarios, we recommend you talk to either a tax accountant or a tax lawyer to know exactly what you’re eligible for and how to claim it.

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.

Type of businessHow to report vehicle depreciation
Sole proprietorshipsOn line 9936 (“Capital cost allowance (CCA)”) of Tax Form T2125 Statement of Business or Professional Activities.
PartnershipsOn line 9943 (“Other amounts deductible from your share of net partnership income (loss)”) in part 6 of form T2125
CorporationsOn of form T2 Corporate Income Tax Return (see Income Tax Folio S3-F4-C1 General Discussion of Capital Cost Allowance)

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.

Best commercial vehicles

Canadian Black Book 2020 Best Retained Value Awards*


Sub-Compact Luxury Crossover

  • Mercedes-Benz GLA-Class

Zero Emission Vehicle

  • Ford focus

Sub-Compact Crossover

  • Honda HR-V

Sub-compact Car

  • Honda Fit

Compact Car

  • Toyota Prius V

Mid-Size Car

  • Honda Accord

Full-Size Car

  • Toyota Avalon

Entry-Luxury-Car

  • Mercedes-Benz C-Class
Luxury Car
  • Lexus GS-Series

Premium Luxury Car

  • Porsche Panamera

Sports Car

  • BMW Z4

Premium Sports Car

  • Porsche 911

Compact SUV

  • Jeep Wrangler

Mid-size Crossover-SUV

  • Toyota 4Runner

Full-size Crossover-SUV

  • Toyota Sequoia

Compact Luxury Crossover-SUV

  • Porsche Macan

Mid-size Luxury Crossover-SUV

  • Mercedes-Benz GLE-Class

Full-size Luxury Crossover-SUV

  • Mercedes-Benz G-Class

Minivan

  • Toyota Sienna

Compact Commercial Van

  • Chevrolet City Express

Full-size Vans

  • RAM ProMaster 3500

Small Pick-up

  • Toyota Tacoma

Full-Size Pick-up

  • Ford F250 Super Duty

*To obtain these results, CanadianBlackBook.com measured 2016-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.

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.

Name Product Loan Amount Interest Rate Loan Term Min. Credit Score Requirements Table description
Coast Capital Commercial Vehicle Loan
$10,000 - No Max.
Varies
18 - 84 months
650
Able to service debt payment of $300/month
Finance or lease new and used commercial vehicles up to 1 ton.
Get competitive rates and flexible terms from one of Canada's largest credit unions. No credit union membership required for this product.
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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

Picture: Shutterstock

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