The shortage of new vehicles means that it’s now possible to make a gain when you resell your used vehicle, but beware: the gain is taxable.
Privately-owned vehicle (personal travel)
The vehicle is considered personal-use property when it is used solely for personal travel. For tax purposes, the proceeds of disposition and the acquisition cost of such property are deemed to be a minimum of $1,000. Only gains realized on the resale of personal property are taxable as capital gains (i.e., taxable at 50%), while losses are not deductible.
Vehicle additions such as premium rims, a top-of-the-line audio system, etc., increase the acquisition cost of the vehicle. In addition, expenses incurred to make the sale, such as advertising costs, are deducted from the gain. Maintenance costs, on the other hand, are not expenses to be considered.
When an individual receives cash from the dealer on the return of a leased vehicle, this amount is taxable. For example, an individual buys back the vehicle at the end of the lease and immediately sells it back to the dealer at a profit. The amount returned by the dealer is taxable as a capital gain. A capital gain also applies if your dealer gives you a rebate on a future vehicle purchase or lease as compensation for a lease return.
IMPORTANT – An individual who repeatedly buys and resells used vehicles at a profit, with short holding periods, could be considered to be operating a business by the tax authorities. The gains realized would then be business income (taxable at 100%), rather than capital gains.
Company-owned vehicle
A cheque received from a dealer following the return of a lease is considered income for a business and will be taxed as a capital gain.
The tax cost of an asset leased under a capital lease, for which the purchase option has subsequently been exercised, is the lesser of the fair value at the time of purchase and the total of amounts deducted since the beginning of the lease plus the cost of the purchase option. The company will realize a 100% taxable recapture of depreciation if the vehicle is sold at a price between the option price and the tax cost of the leased asset. In addition, a capital gain will be realized if the asset is sold at a price higher than the tax cost.
Transparency when reselling your used vehicle
Transparency with tax authorities should always be a priority! For example, the SAAQ is informed whenever a vehicle is sold in Quebec. Revenu Québec then uses this information to detect taxpayers who have failed to declare gains and send requests for information leading to notices of assessment.
Property covered: These concepts apply not only to cars, but also to boats, recreational vehicles, campers, etc. In fact, as soon as the proceeds of disposition of personal property exceed $1,000, we must calculate whether a tax gain has been realized.
An article by Marc-André Pilon, CPA auditor
with the participation of Mathieu Gélinas, tax advisor
