The Taxation of Electric Vehicles
In recent years, Canada has experienced a significant increase in the adoption rate of ZEV (zero emission vehicle). According to Statistics Canada, electric and plug-in hybrid sales grew from two percent in 2018, to 2.7 percent in 2019, and 3.3 percent in 2020. While a large reason for the increase in ZEV adoption can be credited to the improvements of battery technology and subsequently a better selection of electric vehicles, the Government of Canada has also implemented many incentives to help lower the costs of ZEVs for Canadian consumers. This post will briefly highlight the main potential ZEV tax incentives Canadians should be aware of.
What is a Zero Emission Vehicle?
Before diving into the various types and forms of incentives, taxpayers must first ensure that the vehicle they are looking to purchase qualifies as a ZEV. Transport Canada defines zero emission vehicles (ZEV) as vehicles that has the potential to produce zero tailpipe emissions. They can still have a conventional internal combustion engine but must also be able to operate without using it.
Examples of ZEV’s include the following:
- Battery-electric;
- Plug-in hybrid electric; and
- Hydrogen fuel-cells.
Among others, popular vehicles that qualifies as a ZEV include Tesla Model 3, Audi A3 e-Tron and Chevrolet Volt.
Purchase and Lease Incentives
The first incentive offered by the Government of Canada for consumers looking to buy or lease a ZEV is the point of sale incentive. Essentially, the Government of Canada will pay for $5,000 of the final price of an eligible battery-electric, hydrogen fuel cell and longer-range plug-in hybrid vehicles. Alternatively, shorter range plug-in hybrid electronic vehicles are eligible for $2,500. The purchase incentive will be applied at point-of-sale directly on the sale or lease agreement. As a result, the dealership will be responsible for completing the documentation required to receive the incentive.
It is important to note that in order to be eligible for the ZEV program, the vehicle must have either:
- Manufacturer’s Suggested Retail Price (MSRP) of less than $45,000 if vehicle has six seats or lower; or
- Manufacturer’s Suggested Retail Price (MSRP) of less than $55,000 if vehicle has seven seats or greater.
The reasoning for the cap in MSRP is so that the incentive helps overall ZEV adoption rather than just subsidize the purchase price for luxury vehicles.
Capital Cost Allowance and Zero Emission Vehicles
In addition to the point of sale incentive, the Government of Canada also introduced two new Capital Cost Allowance (CCA) classes specifically for businesses looking to adopt ZEVs. As mentioned earlier in the previous blog post about CCAs, capital expenditures are distinct from current expenses in that while both may be incurred for the purposes of earning income, only the latter is immediately deductible under the Income Tax Act.
Class 54 now captures ZEV excluding taxicabs and automobiles used for lease and rent. The CCA rate for this class is 30%. Meanwhile, class 55 captures ZEV for leasing/renting taxicabs and the CCA rate for this class is 40%.
Importantly, businesses can now write off 100% of the purchase price of eligible class 54 and class 55 vehicles, up to $55,000, in the year the car becomes available for use. However, the Government of Canada has also implemented the following phase out period:
- 100% after March 18, 2019 and before 2024;
- 75% after 2023 and before 2026;
- 55% after 2025 and before 2028; and
- 0% after 2028.
As the world strives for a greener future, electronic vehicles will become increasingly more common place. If your business is looking to purchase ZEV’s and capitalize on the current tax incentives, or you have general questions regarding the deductibility of business expenses, contact a professional at Rosen & Associates Tax Law today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.
Kevin Hong
Good article distilling available information without complication.
Setting aside the dealer-level Federal incentives and focusing on the ability to claim the enhanced CCA under Class 54, are businesses and individuals solely limited to those EVs listed on the Transport Canada website? For clarity, could an individual purchase a ‘Tesla Model X’ for business purposes and make use of the enhanced CCA under Class 54?