Latest Canadian Automobile Deduction Limits Announced

by Mike Godfrey, Tax-News.com, Washington

02 January 2012

The Canadian government has released its automobile expense deduction limits and the prescribed rates for the automobile operating expense benefit that will apply in 2012.

The government reviews these rates and limits annually, and announces any planned changes prior to the end of the calendar year. It says that this practice ensures that businesses are aware of the new rates before the beginning of the year in which they apply.

As announced by Finance Minister Jim Flaherty, a number of elements of the system will remain the same in 2012. The ceiling on the capital cost of passenger vehicles for capital cost allowance (CCA) purposes will remain at CAD30,000 (USD29,368) (plus applicable federal and provincial sales taxes) for purchases after 2011. This ceiling restricts the cost of a vehicle on which CCA may be claimed for business purposes.

The limit on deductible leasing costs will remain at CAD800 per month (plus applicable federal and provincial sales taxes) for leases entered into after 2011. This limit is one of two restrictions on the deduction of automobile lease payments. A separate restriction prorates deductible lease costs where the value of the vehicle exceeds the capital cost ceiling. The maximum allowable interest deduction for amounts borrowed to purchase an automobile will also remain the same, at CAD300 per month for loans related to vehicles acquired after 2011.

However, there will be some changes. The limit on the deduction of tax-exempt allowances paid by employers to employees using their personal vehicle for business purposes for 2012 will be increased by 1% to CAD0.53 per kilometre for the first 5,000 kilometres driven and to CAD0.47 for each additional kilometre. For Yukon, the Northwest Territories and Nunavut, the tax-exempt allowance is set 4% higher, and will also increase by CAD0.01 to CAD0.57 for the first 5,000 kilometres driven and to CAD0.51 for each additional kilometre. The allowance amounts reflect the key cost components of owning and operating an automobile, such as depreciation, financing, insurance, maintenance and fuel costs.

Lastly, the general prescribed rate used to determine the taxable benefit relating to the personal portion of automobile operating expenses paid by employers for 2012 will increase by CAD0.02 to CAD0.26 per kilometre. For taxpayers employed principally in selling or leasing automobiles, the prescribed rate will increase by CAD0.02 to CAD0.23 per kilometre. The amount of the benefit reflects the costs of operating an automobile. The additional benefit of having an employer-provided vehicle available for personal use (i.e., the automobile standby charge, which is not affected by this announcement) is calculated separately and is also included in the employee’s income.

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