What are the steps to selling a personal vehicle used for business use to the corporation?
By Philippe Brideau | November 10, 2013
I am the only shareholder of a corporation that has been in business for over five years in B.C. I purchased a vehicle personally two years ago. The vehicle is now being used 100 per cent for business purposes. What are the steps to selling this vehicle to the corporation? I was reading about Section 85 rollover, does this apply here? If I do not sell the vehicle to corporation can the corporation write off all expenses including insurance and loan payments without holding title to the vehicle?
Value of vehicle is approximately $25,000 and it has a loan registered against it for approx. $15,000. Bank will not transfer loan to corporation's name without myself as a personal guarantor. Vehicle is insured under my name but as business use.
Philippe Brideau answered:
Based on the information available, the response to the reader's question is general in nature and may not fit the particulars of the reader.
If a shareholder sells a personal vehicle to his or her corporation, he or she will be considered to have disposed of the vehicle for an amount equal to the fair market value of the vehicle, possibly resulting in a gain or loss and/or an inclusion in income of any recaptured capital cost allowance. Once the vehicle is owned by the corporation, the corporation can generally deduct reasonable expenses incurred to earn income.
A section 85 rollover is typically used in a situation where, in the case of the transfer of a depreciable asset like a vehicle, the fair market value of the asset being transferred to the corporation exceeds the depreciated cost of the asset. Very generally, provided that the requirements of section 85 are met, a section 85 rollover allows a taxpayer to transfer the asset to a corporation and, for purposes of calculating the gain on the disposition of the asset for income tax purposes, allows the taxpayer to elect that the proceeds of disposition be deemed to be an amount less than the fair market value of the asset. However, in order for section 85 to apply in this case, the shareholder must receive at least one share of the corporation as consideration for the vehicle. In order to ensure that all of the requirements related to the proper completion of a section 85 rollover are met, please refer to IT-291R3 - Transfer of Property to a Corporation under Subsection 85(1). For additional information please refer to T4002 - Business and Professional Income. www.cra-arc.gc.ca/E/pub/tg/t4002/
If the corporation incurs expenses related to the vehicle and the corporation does not own the vehicle, the corporation can only deduct reasonable expenses to the extent they are incurred for the purposes of allowing the corporation to earn income. Paragraph 18(1)(r) of the Income Tax Act may limit certain automobile expenses to the per-kilometre amounts determined by regulation. Also, as indicated in paragraph 2 of IT-128R, Capital Cost Allowance- Depreciable Property, the ability to claim capital cost allowance (CCA) depends on ownership. Information on when a taxpayer will be considered to have acquired a depreciable property can be found in paragraph 17 of IT-285R2, Capital Cost Allowance - General Comments. www.cra-arc.gc.ca/E/pub/tp/it285r2/
In addition, the shareholder may be considered to have received a taxable vehicle allowance or shareholder benefit for expenses paid on the shareholder's behalf. Please refer to Guide T4130 - Employers' Guide - Taxable Benefits and Allowances and T4044 - Employment Expenses for additional information. www.cra-arc.gc.ca/E/pub/tg/t4130/ and www.cra-arc.gc.ca/E/pub/tg/t4044/