Millions of people purchase new and used cars in Canada each year, either for commercial purposes or personal usage.
But before you finalize your purchase, you need to be aware of the depreciation rates that your vehicle will sustain through time. There are multiple reasons why you need to understand the way depreciation works and the rate at which the car you’re edging to buy will depreciate down the road.
The most important one is that understanding depreciation helps you decrease its impact on your ride, assess your annual costs and expenses better and even save you more money for the long term.
Considering the importance of such an investment, it would greatly benefit you to do your end of the relevant research. To shorten your search, the experts at Surex have already discussed everything there is to know about vehicle depreciation rate Canada.
What is meant by vehicle depreciation?
To put it in simple words, ‘depreciation’ is the proper terminology used to explain how something decreases in value and costs over time — in the instant case, that would be vehicles in Canada.
In layman’s terms, it is an amount by which the vehicle loses its market value over time. Depreciation is the reason why old cars are valued lower.
Also, commercial vehicles usually depreciate quicker than personal ones because of how often and intensively they are used, such as a pick-up truck, a minivan to transport goods, etc.
Vehicle depreciation rate Canada 101 — what should you know?
For cars, they tend to depreciate by 10% as soon as they are driven out of the shop. It is followed by an additional rate of approximately 10% to 20% by the year-end. And after a period of one year, they start depreciating at the rate of 15% to 25% each year.
So within five years, it would have depreciated by more than 60% and would have lost a similar amount of its original value.
Another thing to note would be that new cars depreciate quicker than used ones because the depreciation rate for cars in Canada is the highest in the first year.
It means that if you buy a car that is a year old, it will save you up to 30% in depreciation costs. It is a great deal for buyers and brings in more profit if buyers decide to sell the car down the line.
Some financial models also prescribe depreciation based on the mileage run by the car instead of the passage of time.
Capital cost allowance
The Capital Cost Allowance (CCA) is the legal word used to define depreciation. It is also the only permitted depreciation charge.
In accordance with Canadian laws, it is the term that is used for a portion of the total costs of the property (vehicles, buildings, etc.) that can be deducted from income taxes.
The Canadian Costs and Revenue Agency (CCRA) has defined properties that can depreciate and compiled them into 15 different classes. This compilation and division are based on the tax rates of CCA and the usage of said properties.
Motor and passenger vehicles fall into Class 10 and Class 10.1 of the given classes and have a maximum CCA rate of 30%.
Certain factors to consider
Several factors affect the cost and value of your car and, ultimately, its depreciation rate. Some factors include the following:
- Mileage– With more mileage on your vehicle, the depreciation rates will also increase.
- The make and model of the vehicle– The make and vehicle model have a significant impact on the depreciation rates of your vehicle. For example, electric vehicles depreciate faster than those that run on gas.
- State and condition– It is evident that the condition of a car directly affects its value. If your car has scratch marks or dents on its surface, then you should prepare yourself for a significant drop in value.
- Customizing– The splash of vibrant neon for a flashy look may look appealing to you now. But the next owner may not have the same idea. The more decorations and customizations you make on your car, the fewer people there will be that are willing to buy it.
Calculate the vehicle depreciation rate Canada
Remember that the claims for your expenses on a commercial vehicle are not determined for a calendar year but a business year. Thus, to determine the rates and costs, follow the given steps:
- Calculate the original cost. It is the total amount that you paid for your vehicle before any taxes.
- Refer to the definitions given under the Canada Revenue Agency (CRA) and determine the type of category your vehicle falls under. It will be one of the following four categorizations:
- Zero-Emission Vehicle (ZEV)
- Zero-Emission Passenger Vehicles (ZEPV)
- Motor Vehicle
- Passenger Vehicle
- Next, you have to decide which class it belongs to as per the given CRA regulations. The majority of the motor and passenger vehicles belong to either Class 10 or Class 10.1, respectively.
- Now proceed to apply the annual depreciation rate or CCA given for the relevant class of the vehicle’s total cost. For Class 10 and Class 10.1, the annual CCA rate shall be 30% at most.
- The outcome you get is the Capital Cost Allowance, i.e., depreciation applicable for your vehicle, and you can calculate your expenses accordingly and deduct it from your income tax as well.
To give an example, let’s say you buy a brand new car for $50,000. After the first year, a CCA rate of 10% is applied to the vehicle.
If you punch these numbers into a calculator, you can find that $50,000 x 0.10 equals $5,000.
The $5,000 is the CCA, and your vehicle is now valued at only $45,000 after the first year itself.
Buying a new car for personal use or commercial reasons can be an exhilarating experience. But without the proper research and understanding of the technicalities that go into buying a car and consequent expenses, you might be putting yourself up for more losses than benefits. So proper understanding and research of vehicle depreciation Canada is a necessary prerequisite.
If you have any questions about how the depreciation rate affects your car insurance, don’t hesitate to contact a Surex insurance broker.