Introduction

As the world grapples with the pressing issue of climate change, countries are increasingly focusing on green and sustainable initiatives. In Canada, this commitment to sustainability is reflected in recent changes to tax laws, particularly those related to Zero-Emission Vehicles (ZEVs). In this article, we delve into the tax incentives introduced for ZEVs, including the creation of new Capital Cost Allowance (CCA) classes (54 and 55), enhanced first-year CCA allowances, and changes to the prescribed amount for ZEVs. Additionally, we will explore the implications of these measures for businesses and individuals.

Capital Cost Allowance (CCA) Classes 54 and 55

The Canadian government has introduced CCA classes 54 and 55 for ZEVs acquired after March 18, 2019. These classes encourage businesses to invest in ZEVs by offering favorable tax treatment.

• Class 54: This class applies to ZEVs that would typically fall into class 10 or 10.1, essentially other automobiles. It has a CCA rate of 30% and applies on a declining-balance basis.
• Class 55: Class 55 is designed for ZEVs otherwise included in class 16, which includes automobiles for lease or rent and taxicabs. It shares the same CCA rate of 40% with class 16 and also applies on a declining-balance basis.

Electing Out of Class 54 or 55

Businesses have the option to elect not to include a ZEV in class 54 or 55. When this election is filed, the vehicle will be treated as a conventional automobile and placed in its usual CCA class (10, 10.1, or 16). This flexibility allows businesses to make informed tax decisions based on their specific circumstances.

Eligibility Criteria for Zero-Emission Vehicles

To qualify as a ZEV, a motor vehicle must meet certain criteria:

• It must be for use on streets and highways.
• It must be fully electric or a plug-in hybrid with a battery capacity of at least 7 kWh, or fully powered by hydrogen.
• It must not have been used or acquired for any purpose before being acquired by the corporation, unless acquired after March 1, 2020.
• It cannot be a vehicle for which the Government of Canada paid assistance under a prescribed program or a vehicle for which another person or partnership has deducted CCA or claimed a terminal loss.

Enhanced First-Year CCA Allowance

An enhanced first-year CCA allowance is available for eligible ZEVs acquired between March 18, 2019, and 2028:

• 100% for vehicles acquired between March 18, 2019, and 2024.
• 75% for vehicles acquired after 2023 and before 2026.
• 55% for vehicles acquired after 2025 and before 2028.

This enhanced allowance provides a significant upfront tax benefit to businesses investing in ZEVs.

Prescribed Amount for Zero-Emission Passenger Vehicles

For zero-emission passenger vehicles included in class 54, a prescribed amount is used to determine the CCA. When the capital cost of a ZEV exceeds this prescribed amount (currently $59,000 as of January 1, 2022), it is deemed to be the prescribed amount for tax purposes.

Disposition of Zero-Emission Passenger Vehicles

When a zero-emission passenger vehicle is disposed of to a party with which the corporation deals at arm’s length and its cost exceeds the prescribed amount, the proceeds of disposition will be adjusted based on a factor related to the prescribed amount as a proportion of the actual cost of the vehicle. Additionally, recent legislation adjusts the actual cost for government assistance received for dispositions after July 29, 2019.

Conclusion

The introduction of favorable tax treatment for ZEVs, including new CCA classes, enhanced first-year allowances, and adjustments to prescribed amounts, underscores Canada’s commitment to promoting sustainable transportation. These incentives not only benefit businesses but also contribute to reducing greenhouse gas emissions and mitigating climate change. As the world shifts towards a greener future, incorporating zero-emission vehicles into your fleet can lead to significant tax advantages while fostering environmental responsibility.