If you buy a pick-up truck, van or similar light truck for your business, you do not want it classified as an “automobile” or “passenger vehicle” for income tax purposes. If it is, there are certain tax costs, such as the “standby charge”, applying to your personal use of the vehicle, and a cost limit of $36,000 in 2023 (before sales taxes) for purposes of claiming capital cost allowance. (For an electric vehicle, the cost limit this year is $61,000.)
To avoid it being an “automobile”, you generally must be able to show that your vehicle meets one of the following conditions:
(i) it is a van, pick-up truck or similar vehicle; and it has seating for not more than the driver and two passengers; and you used it in the taxation year in which it was acquired or leased “primarily” (more than 50%) for transporting goods or equipment in the course of your business
or
(ii) it is a van, pick-up truck or similar vehicle; and you used it in the taxation year in which it was acquired or leased “substantially all” for transporting goods, equipment or passengers in the course of your business (CRA considers that “substantially all” means 90% or more)
or
(iii) it is a pick-up truck that you used in the taxation year in which it was acquired or leased “primarily” (more than 50%) for transporting goods or equipment in the course of your business in a remote location that is at least 30 kilometres from the nearest urban area with a population of 40,000 or more.
All of these conditions refer to the extent to which you used the vehicle in the taxation year in which the vehicle is acquired or leased. This creates a trap. Suppose you buy a pick-up truck on December 30, so that you can start claiming capital cost allowance this year. But it’s holiday time, and you don’t start using the truck until January. The truck will not be able to meet the “use” test, and you will be stuck with the negative effects of having what the Income Tax Act calls an “automobile” — for the entire period that you own the truck.
This is exactly what happened in the case of Olson v. The Queen, 2007 TCC 508. The Tax Court of Canada described the result as “harsh”, but had no choice in finding against the taxpayer: the “automobile” rules applied to the truck in question.