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Discussion Starter #1
My wife is in a sticky situation. She was leasing a vehicle for her self-employed work and writing off all of the lease payments. Then at the end of the lease, she bought out the vehicle (didn't write off the purchase). At that point she is the owner of the vehicle and claimed a business portion of the vehicle expenses. A few months later, she crashed it and received a generous insurance payout due to our good insurance policy. Our accountant says that we need to claim the payout as income, which would result in about $5000 in taxes! He argues that because over the years she had written off all of the expenses while leasing, the car essentially is a business asset, since it was claimed 100% for work while under lease. However, I feel like a case can be made that, at the time of the crash, the situation was different since the car had become a personal asset. What does the previous history of the vehicle matter? Any thoughts, good Canadians?
 

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Your accountant is almost right but is missing an important point. Listed below is the "Business and Professional Income Tax Guide". Look at the 2nd last paragraph of page 34 for "Proceeds of Disposition" of depreciable property.

http://www.cra-arc.gc.ca/E/pub/tg/t4002/t4002-14e.pdf

If you received insurance proceeds to reimburse you for the
loss or destruction of depreciable property, enter the
amount you spent to replace the property in column 3 of
Area A, as well as in Area B or Area C, whichever applies.
Include the amount of insurance proceeds considered as
proceeds of disposition in column 4 of Area A, as well as in
Area D or Area E, whichever applies. This could include
compensation you receive for property that someone
destroys, expropriates, steals, or damages.
Now as I see it, your wife was writing off her lease payments but then stopped writing off anything once the car was purchased from the lease. She should have been writing off the purchase price over the later years as a depreciating capital property as outlined in this guide. She would have saved a lot of money in tax. Since she did not, I would say that if the insurance cheque is less then what she paid for the car, when she bought out the lease, no income was generated and no taxes should be owed. If the insurance proceeds is more then the lease buyout price, she at best generated a capital gain for the difference only.

So my question is: Did she pay more then $5,000 to buy out her lease, or less?

Keep in mind, the insurance company most likely did not give your wife anything for the value of the car that she was writing off with her earlier lease payments. That amount of the car was long spent as the car devalued over her years of ownership. The insurance company would most likely only give her the remaining value of her car, which as you said, she was not writing off.

In a nutshell, your accountant is wrong. The insurance payment is most likely not taxable or at worst not much of it is taxable. Personally I would ignore it.
 

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Discussion Starter #3
Thank you for the reply!

The insurance payout was about 20K (in 2014) and she spent about 10K (in 2013) to buyout the car. We had a good policy which actually paid us the full value of the car as if it were brand new, not the remaining value.

Once the car was purchased she was writing off a portion for business use. Actually I think she used an allowance rate.
 

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OK, I misread. I thought the insurance payout was $5,000. In what you describe, it would appear that she had a capital gain of around $10,000 (that was a very nice insurance policy). Since she was not writing off the value of the car, after 2013, this has nothing to do with her business expenses. It was never an equipment acquisition for business purposes and the fact that she deducted gas and other car expenses are not important since they were not recouped by the insurance payout.

If a declaration is required, I would record it on schedule 3 as a personal capital gain. The benefit here is that the $10,000 gain would only result in $5,000 of taxable income (which could be reduced if she has any other capital losses from prior years - see notice of assessment). Even in a 40% tax bracket she would only owe $2,000 of taxes and if her taxable income is lower then $87,000 or so, the amount owed would be even lower.
 

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Discussion Starter #5
Thanks OpsyEagle. I just met with my accountant again and I think he's right, I was just missing the details. (I thought that the full 20,000 would be taxed!) She was still claiming the car for business use after the buyout, including depreciation. So the reported gain will be about 20,000 minus the depreciated value, which was about 8000 at the time. And since she claims the car 80% for business use, we will report 80% of the 12,000 as business income, which I think makes sense. Would you agree? Thanks a lot for your input.
 

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Yeah, that looks about right. Since she was still depreciating it, this now becomes a recapture as opposed to a personal capital gain. Obviously if she bought another car then she could depreciate that or write off the lease payment, but I suppose the accountant has probably already factored that in, if it applied.

Oh well, she did make a lot of money on that insurance deal. I am quite surprised that an insurance company would insure a $10,000 car for $20,000. I would think that if they kept that up, their claims experience could start to get out of control. Anyway, she was up $10,000 in car gains and down $5,000 in taxes (probably a little less), so it still looks like a win to me.
 

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Discussion Starter #7
We ended up receiving another old vehicle as a gift so that is being factored in as well. We were surprised by the settlement too, but we decided not to question it too much. :)
 

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I am quite surprised that an insurance company would insure a $10,000 car for $20,000.
It's called a "waiver of depreciation". Most insurance companies offer it on new car purchases, usually up to two years, but you can get longer. In the event of a write off, you get your purchase price back, not the depreciated value. I suspect that the OP had some form of this and the $20,000 was the value of the car when first leased.
 
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