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 (pick-up trucks, vans or similar vehicles) can also be used outside the farm business, which causes complications from a tax perspective.
If classified as a Class 10.1 asset, these vehicles are limited to a $30,000 depreciable cap regardless of the actual vehicle cost, but if they’re classified as a Class 10 asset, there is no depreciable cap. For the latter class-10 classification to apply, at least one of the following tests must be met:
• The vehicle’s seating capacity is three or less (including the driver) and it is used more than 50% 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% 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 kilometers from a population of 40,000) and the vehicle is used more than 50% 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% 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 vehicle as Class 10, the easiest test to qualify for is to purchase a vehicle with a capacity of three or fewer passengers, because a vehicle that meets this test only needs to be used more than 50% of the time in the taxation year it was acquired or leased to transport goods and equipment for the farm. Unfortunately, not many modern pick-up trucks are made with this limited seating capacity. 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, then purchasing a cargo van with limited seating capacity might be an alternative option. If the strength and towing capacity of a truck is preferable to a cargo van, and an extended cab truck is the only vehicle available, the removal of the additional seats could allow the truck to fit within the “limited seating capacity” exception.
Two or more vehicles
In order to include the vehicle into class 10, as outlined in the above tests, the farmer must support that the vehicle is being used either 50 or 90% by the farm business to transport goods, equipment or passengers. If a farmer also owns a vehicle personally, then sometimes the farmer mistakenly assumes that the farming vehicle would automatically be viewed by the Canada Revenue Agency as being used exclusively in the farming business for transporting goods, equipment or passengers. However, the ownership of other personally owned vehicles does not erase the burden of proof placed on the farming business to support the business usage of the farming vehicle in the year acquired or leased. Therefore, the need to have an accurate log book to document business vs. personal usage of the farm vehicle is highly recommended. Having access to a personally owned vehicle can help support the documented business usage, but also having the log book is preferable.
Qualify now, for tomorrow
Even if it’s unlikely your new vehicle will be used continuously more than 90% 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 the farm’s taxation year, simply make sure it is used exclusively (more than 90%) for transporting goods, equipment or passengers until the end of that taxation year, even if this is only a few days. Assuming, again, you are keeping a detailed log book to support the business portion of this initial usage, your vehicle could qualify as Class 10 for its entire life, even if this business usage drops below 90% in future years.
Beware the standby charge
If the vehicle does not meet one of the tests outlined above, not only would the farm business no longer benefit from the Class 10 treatment, but the farmer personally could be subject to a taxable benefit called a “standby charge.” The “standby charge” is a technical calculation that is used to recognize the personal benefit of having a farming vehicle available for your personal use. The value of the “standby charge” is based upon the original cost of the vehicle when it was purchased (not subject to the $30,000 cap). The standby charge calculation is equal to 2% multiplied by the cost of the vehicle, times the number of months available. For example, a $60,000 class 10.1 farm vehicle could result in a $14,400 taxable standby charge if it was available for personal use for an entire year. The farm vehicle does not have to be used personally to apply the standby charge, it just has to be available for use personally. Avoiding the standby charge in an audit could be difficult to avoid in situations where the principal residence is located on the farm property. On top of the “standby charge,” a taxable “operating benefit” based on the number of personal kilometers actually driven would also be calculated. Both of these charges would be added to the farmer’s personal taxable income and could be quite substantial depending on the circumstances.
Perhaps own it personally?
If there is any doubt that the vehicle would meet one of the above tests to be included in class 10, then it may be preferable to own it personally. Owning the vehicle personally would allow you to avoid this “standby charge.” In this case, you would pay all the vehicle expenses personally but then reimburse yourself for the business use instead. The CRA publishes a list of automobile allowance rates that are acceptable for this purpose on their website at the following link: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/automobile/automobile-motor-vehicle-allowances/automobile-allowance-rates.html
In 2021, the allowance was $0.59 for the first 5,000 km and $0.53 after that. As always, it is recommended that you maintain a logbook to support the number of kilometers that you claim.
Potential tax consequences when purchasing a farm vehicle can be avoided by contacting your trusted advisor prior to saying yes to that new truck.
Partner - Baker Tilly GWD