OPTIONS AVAILABLE IN USING SNOWMOBILE FOR TAX DEDUCTION
Originally published on January 6, 2011
One of my clients called recently to tell me about his new 2011 snowmobile that he had bought for $15,800.It wasn’t long into our conversation when he said how handy this new snow machine would be for monitoring grain stored away from his farmyard, either in bags or in hard-to-get-at bins.
My job was to find the most beneficial way to write it off on his current and future year corporate tax returns. For the snowmobile to be considered tax deductible, the farmer must first establish that it has a business purpose. Direction on this was provided in the 1970s by the Tax Review Board.
In his 1976 and 1977 taxation years, Regina farmer and government worker Ralph A. Gerock had a capital cost allowance reversed by the Canada Revenue Agency because its auditors concluded that the snowmobile he bought in 1975 was for personal use.
In 1980, Gerock’s appeal was heard by the Tax Review Board. Gerock argued that the snow machine was used to haul manure and feed for his horses. The judge agreed, stating that the snowmobile was “a necessary expense in his horse breeding operations for the care and maintenance of the horses.”
There was some irony in this case’s final decision because Gerock, while being able to capitalize his snowmobile, was not able to write off the earlier cash basis purchase of his horses.
As for my client, he uses his snowmobile to monitor grain bins at three separate sites as well as grain bags left in his fields at harvest. This kind of grain storage would not be accessible in the winter without a snow machine. For this reason, we would argue that the snowmobile meets and exceeds the business purpose test: the care and safeguarding of the harvested crop. Determining how to measure the business portion is where things become blurry.
The Income Tax Act requires taxpayers to use a reasoned approach when measuring the business use of an expenditure. For our client, we decided to use his log book from the past 14 years on his former snowmobile to measure the business portion.
In reviewing his log book, we determined that our client used his snowmobile on average 10 times per year. He estimated that each trip was of equal odometer hours. On average, eight of these trips were made to inspect and monitor the harvested crop. The remaining two trips were for personal use.
There are two ways to write off the snowmobile for tax purposes:
• Capitalizing the business portion of the snowmobile on Schedule 8 of the corporate tax return. This translates into an annual claim for capital cost allowance, which is deducted and expensed each year. It is a “first year claim it and forget it” tax filing position. For insurance and licensing purposes, the snowmobile will be beneficially owned by the corporation. If the farmer cannot prove his continued 80 percent business portion, then CRA would expect subsequent year adjustments to Schedule 8.
• Writing off the snowmobile on a per trip basis. Each time the snowmobile is used to inspect or monitor the harvested crop, the farmer invoices his company for its use. For insurance and licensing purposes, the snowmobile will be beneficially owned by the individual farmer.
In this scenario, the farmer must estimate the number of trips over the life of the snowmobile. For our client, we used the log on his former snowmobile to estimate a total of 140 trips.
We believe the second option of writing off the snowmobile on a per trip basis generates an easier explanation to a CRA auditor.
With the cost of new snowmobiles exceeding the price of a modest car, would an 80 percent claim upfront on Schedule 8 be considered an aggressive tax filing position?
We think it might be.
For our client, we found that his former snowmobile of 14 years generated a per trip claim of $33 plus GST. His new snowmobile for the next 14 years would be expensed on a per trip basis of $102 plus GST.
We reasonably expect our client will use the new snow machine 140 times over its useful life. If we surpass our overall average of 10 trips per year, then our per trip cost would have to be reduced to be reasonable in the eyes of the CRA.
By year 14, we calculate an overall tax shield or net benefit of $1,777 by claiming the new snowmobile on a per trip basis.
If our client decided to capitalize his new snowmobile on Schedule 8, he could expect an overall tax savings of $1,273 by year 14 using a Saskatchewan corporate tax rate of 15.5 percent.
In our analysis, we assume he will dispose of the snowmobile at the end of the 14th year at 35 percent of its original purchase price.
This results in income to the company in the form of recaptured capital cost allowance, which reduces our overall tax shield and net benefit.
We generally keep our clients’ snowmobiles out of the farming companies and expense them on a per trip basis rather than using the upfront Schedule 8 claim.
This decision works for our office and clients, but we encourage anyone contemplating this decision to review it with their accountants or tax preparers.
One thing is for sure: trips on a snowmobile cost more than they used to.