Zero-Emission Vehicles – Good for the Environment and Your Tax Bill?

The Federal government has recently announced new incentives to make zero-emission vehicles (“ZEV”) more affordable for Canadians.  If you are considering purchasing an electric, hybrid, or hydrogen fuel car, then keep reading to see how you may qualify.

Incentive for Zero-Emission Vehicles (“iZEV”) Program

Effective May 1, 2019, the federal government will provide a point-of-sale incentive for consumers who buy or lease an eligible ZEV.  An iZEV incentive of up to $5,000 is available, based depending on the type and range of the vehicle, and is in additional to any provincial zero-emission incentives that are offered in certain Canadian provinces.  To eligible for the federal iZEV program, the vehicle must be:

  1. A vehicle with 6 seats or fewer where the base model Manufacturer’s Suggested Retail Price (“MSRP”) is less than $45,000; or
  2. A vehicle with 7 seats or more, where the base model MSRP is less than $55,000.

Higher priced versions (i.e. higher trim level) of vehicles that meet the above criteria may also be eligible for the iZEV program, provided that their MSRP is not more than $55,000 (6 seats or fewer) and $60,000 (7 seats or more).  For the purposes of the iZEV, MRSP does not include fees paid for delivery, freight and add-ons such as vehicle colour or accessories.  Transport Canada maintains a list of eligible vehicles here.

Eligible vehicles that are leased for 48-months or longer will receive the full incentive.  The incentive will be prorated for shorter leases.

In order to receive the incentive, the dealership is responsible for sending the required documentation to Transport Canada.  The incentive amount will then be applied directly to the customer’s bill of sale or lease agreement.

Each individual is eligible for one incentive under the iZEV program per calendar year.  Businesses and governments operating fleets are eligible for up to 10 incentives under the iZEV program per calendar year.

Enhanced Capital Cost Allowance

As part of the 2019 federal budget, the government has proposed a 100% write-off in the first year that a ZEV is purchased for used in business.  This could include businesses operated through corporations, self-employed individuals, and even employees who are required to use their vehicle for work purposes.

To be eligible, the ZEV must be:

  1. A plug-in hybrid with a battery capacity of at least 15kWh, fully electric, fully powered by hydrogen or powered by a combination of electricity and hydrogen; and
  2. A brand new vehicle purchased on or after March 19, 2019 (used vehicles do not qualify).

To implement these new measures, two new classes have been created for capital cost allowance (“CCA”) purposes.  Generally, eligible ZEVs that previously would have been included in class 10 or 10.1, such as passenger vehicles, would now be included in new class 54.  ZEVs that previously would have been included in class 16, such as taxis or freight trucks, would now be included in new class 55.

Below is a chart comparing some of the old and new CCA classes.  One significant difference between Class 10.1 and Class 54 is the application of recapture and terminal loss upon disposition of the vehicle.  This means that any gain or loss incurred when a class 54 vehicle is sold or traded-in will be recognized in income at the time of the disposition.  On the other hand, gains and loss upon disposition are not recognized under the class 10.1 regime.  This is discussed in our example further below.

Where the vehicle is a zero-emission passenger vehicle to be included in class 54, the write-off is capped at a purchase price of $55,000 plus sales tax.  A passenger vehicle is generally a motor vehicle designed to carry people on highways or streets and seats a driver and no more than 8 passengers.  This generally includes most cars, vans, and pick-up trucks.  There is no limit on zero-emission motor vehicles that are not passenger vehicles.

Note that the enhanced 100% CCA rate is temporary and is set to phase out starting in 2024.  Taxpayers that do not wish to use the enhanced CCA treatment can file an election with the Canada Revenue Agency to opt out of this special treatment.

For GST/HST purposes, the previous maximum of $30,000 will also been increased to $55,000 for the purposes of claiming input tax credits on zero-emissions vehicles.

Comparing the Incentives

IMPORTANT:  A vehicle that has received an incentive under the iZEV program is not eligible for the enhanced CCA measures.

If the vehicle is purchased for personal use, then the iZEV program incentive is available.  However, if a vehicle is being purchased for business or employment purposes, as discussed above, then a choice will need to be made as to which incentive is most beneficial.  To compare the two incentive programs, let us consider the following example.

Example

Janice purchases a zero-emissions passenger vehicle on October 1, 2019 for her self-employed business.  The vehicle costs $56,500 ($50,000 plus 13% HST) and qualifies for both the iZEV program and enhanced CCA incentives.  The car is used for business purposes 60% of the time.  Janice pays personal income tax at a rate of 40%.

Potential Tax Savings in First Year – Regular CCA and iZEV Program

Class 10.1 CCA

= $33,900 x 30% CCA rate x 1.5 AII factor (see note below) x 60% business use x 40% tax rate

= $3,661

iZEV Program Incentive

= maximum of $5,000 per annum

Total = $8,661

Note: A factor of 1.5 is applied as a result of the Accelerated Investment Incentive (“AII”) measures.  To learn more about the AII, please refer to our blog dated December 3, 2018 entitled “The Accelerated Investment Incentive – Department of Finance Announces New Tax Incentive for Capital Expenditures”.

Potential Tax Savings in First Year – Enhanced CCA

Class 54 CCA

= $56,500 x 100% enhanced CCA rate x 60% business use x 40% tax rate

= $13,560

In this particular scenario, Janice could potentially receive larger tax savings by claiming enhanced CCA as opposed to receiving the iZEV program incentive.   However, keep in mind that this example only considers the immediate tax savings upon purchasing the vehicle.  There are also significant differences between the two scenarios at the time of disposition, such as recapture and terminal loss, which was discussed above.  For example, if Janice subsequently sells her vehicle for $25,000, she could be required to recapture half the previously claimed CCA and include the amount in her income.  This would effectively eliminate a portion of the potential tax savings that was calculated above.

If you have any questions about our blog or would like more information on how this incentive can help your business reduce its tax bill, please contact your Kraft Berger LLP advisor.

Written by Sara Tan

Sara Tan
Senior Manager, Tax
stan@kbllp.ca
905-475-2420 x337