February 18, 2021 by Thomas Blonde

How to maximize tax benefits for farm vehicles

While many of the vehicles purchased by farm businesses – such as tractors and other farm machinery – are used exclusively for business purposes, some road-going vehicles (i.e., pick-up trucks, vans) can also be used outside the farm business, which causes complications from a tax perspective. If one of these vehicles is classified as a Class 10.1 asset, it would be limited to a $30,000 depreciable cap regardless of the vehicle cost, but if it is classified as a Class 10 asset, there is no depreciable cap. For the latter classification to apply, at least one of the following tests must be met:

  • The vehicle’s seating capacity is three or less (including driver) and it is used more than 50 per cent of the time in the taxation year it was acquired or leased to transport goods and equipment for the farm; 
  • The vehicle’s seating capacity is more than three but is used more than 90 per cent of the time in the taxation year it was acquired or leased to transport goods, equipment or passengers for the farm; or 
  • The farm is operating in a remote location (at least 30 kilometres from a population of 40,000) and the vehicle is used more than 50 per cent of the time in the taxation year it was acquired or leased to transport goods, equipment and passengers for the farm.

If a farm business purchases a pick-up truck and doesn’t meet one of these tests, the write-off for depreciation (capital cost allowance) has a limit of $30,000. If the vehicle in question is worth more than $30,000 and you want to write off the entire cost, you should take the steps necessary to ensure your vehicle qualifies as a Class 10 asset.

Pick the right vehicle
When selecting a vehicle and deciding how it is used, try to be realistic and keep the Class 10 tests in mind. For example, if you purchase a luxury extended cab truck, you may have a harder time arguing it’s being used more than 90 per cent of the time to transport goods, equipment or passengers for the farm business, as that is not the intended (or ideal) function of that vehicle. In contrast, a more utilitarian pick-up truck could be a more plausible vehicle for farm business purposes due to its utility.

Capacity is key
If you’re trying to classify your truck or van as Class 10, the easiest way to qualify is to purchase one with a capacity of three or fewer passengers because a truck or van that meets this test only needs to be used more than 50 per cent of the time to transport goods and equipment for the farm. Unfortunately, most modern pick-up trucks have two or three seats in the front with additional seats in the extended cab. If carrying more than three individuals in the vehicle is not crucial, it might be preferable to purchase a cargo van with limited seating capacity. If the strength and towing capacity of a truck is preferred, and an extended cab truck is the only vehicle available, removing the additional seats could enable the truck to fit within the “limited seating capacity” exception. 

Two or more vehicles
In order to classify the vehicle as Class 10, the farmer must be able to show the vehicle is being used by the farm business to transport goods, equipment or passengers at least 50 or 90 per cent of the time (depending on the test being met). Farmers who also own a vehicle personally sometimes make the mistake of assuming the Canada Revenue Agency (CRA) needs to view the farming vehicle as being used exclusively in the farming business. However, the ownership of other personally owned vehicles does not erase the burden of proof placed on the farming business to support the business use of the farming vehicle in the year acquired or leased. Therefore, an accurate logbook to document business vs. personal use is highly recommended. Having access to a personally owned vehicle can help support the documented business use of the farm vehicle, but it is not a suitable substitute for a logbook.

Qualify now, for tomorrow
Even if it’s unlikely your new truck or van will be used continuously more than 90 per cent of the time for transporting goods, equipment or passengers, there is one way you can meet this test. If you purchase the vehicle late in your farm’s taxation year, simply make sure it is used more than 90 per cent of the time for transporting goods, equipment or passengers until the end of that taxation year, even if this is only a few days. Assuming you are keeping a detailed logbook to support the business portion of this initial use, your truck or van could qualify as Class 10 for its entire life, even if the business use drops below 90 per cent in future years.

Beware of the standby charge
If the vehicle does not meet one of the tests outlined above, the farm business may not benefit from the Class 10 treatment and the farmer could be subject to a taxable benefit personally. Known as a “standby charge,” this is a technical calculation used to recognize the personal benefit of having a farming vehicle available for personal use. The value of the “standby charge” is based upon the original cost of the vehicle when it was purchased and it is not subject to the $30,000 cap. The farm vehicle does not have to be used personally for the standby charge to apply, it just has to be available for personal use. In situations where the principal residence is located on the farm property, this charge can be difficult to avoid. In addition, a taxable “operating benefit” based on the number of personal kilometres driven would also be calculated and both charges would be added to the farmer’s personal taxable income, which could result in a substantial tax bill, depending on the circumstances.

Personal ownership
If there is any doubt the vehicle meets one of the above tests, owning the vehicle personally may be your best bet. If you take this approach, you can avoid the “standby charge,” pay all the vehicle expenses personally and reimburse yourself for the business use instead. The CRA publishes a list of automobile allowance rates that are acceptable for this purpose. In 2021, the allowance is $0.59 for the first 5,000 km and $0.53 after that. Once again, it is recommended you maintain a logbook to support the number of kilometres you claim. 

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Thomas Blonde Thomas Blonde
Elora, Ontario
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