Guide to car depreciation in Canada

Car depreciation is the amount a vehicle will lose its value over time. Various factors cause a car to depreciate, such as age, mileage, and wear and tear. 

For self-employed individuals and small business owners, this could impact how much your capital cost allowance (CCA) you can write off on your tax return, how much profit you can earn from re-selling your car, or what the trade-in value will be. 

Here, we’ll guide you through how to calculate CCA for your vehicle, car depreciation rate factors, and ways you can preserve your car’s value.

Capital Cost Allowance (CCA) for work vehicles 

If you run a business and buy a vehicle for work, you may be eligible to deduct the depreciation on your tax return (aka claiming the Capital Cost Allowance). Self-employed individuals and business owners can write off their CCA on Form T2125. Also, employees who incur vehicle expenses may also qualify for claiming CCA when filing their taxes by filling out form T777. 

Vehicles usually fall into either Class 10 or Class 10.1, according to the Canada Revenue Agency (CRA). These types of classes determine the maximum CCA rate you can claim. The maximum CCA rate for these classes is 30%.

You’ll use the CCA rate to calculate the total costs, which may include taxes, delivery costs, and freight charges. 

Find more details in our article about how to calculate the CCA for vehicles. 

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Key depreciation factors

Here’s an overview of the main factors that cause depreciation and how it may impact the value of a car:

• Mileage: The higher the mileage, the lower your car’s value. 
• Age: The older your car, the more likely it is to have depreciated. 
• Wear and tear: Noticeable damage and poor condition will drastically affect the resale price. Regular upkeep will help to slow this down. 
• Safety rating: The higher the safety rating, the more confidence buyers will have in the vehicle. 
• Technology: Outdated features will accelerate the depreciation rate, while modern technology will enhance the appeal and resale value. 
• Paint colour: Avoid unique paint colours as they make it harder to resell.
• Accident records: If you’ve been in an accident and there’s damage to the car, it could lower the car’s value. 
• Maintenance history: Documenting the routine maintenance reassures buyers and slows depreciation. However, if it’s expensive to maintain, it may deter potential buyers. 
• Government subsidies: There are certain government programs that offer incentives for buyers to purchase certain types of vehicles, such as electric vehicles. 
• Warranties: When purchasing a new car, it should come with a warranty. It could be transferred to the next owner if it's still valid. Once the warranty expires, the car’s value maybe lower. 
• Rusting: If you drive in winter conditions or if there’s exposure to salt, it can cause your car to rust. This will impact the car’s appearance and cause it to depreciate in value.

Types of cars and rates of depreciation

The following is a breakdown of the various car types and their estimated car depreciation rate:

Compact cars

Not all compact cars are created equal. Some may experience steeper depreciation than others, but averages about 40% over five years. Their fuel efficiency, affordability, and high demand in the resale market bolster their value compared to large vehicles. Search for a brand and model that proves it has a reliable resale value. 

SUVs

These types of vehicles tend to depreciate at a slower rate (at 41% over five years) than compact cars. However, larger SUVs may consume more fuel and have higher maintenance costs, which can lead to faster depreciation.

Hybrids

Having a hybrid vehicle means it may depreciate at a slower rate, on average 37% over five years. They are popular due to their long-term fuel savings potential and eco-friendly features. Although, battery replacements may impact the car’s value. 

Electric vehicles (EVs)

EVs tend to have a fast depreciation within the first year, and average nearly 49% after five years. Concerns about the battery life and evolving technology cause it to lose value faster than gasoline cars. Furthermore, incentives for electric vehicles also bring down the price of a car. 

Luxury cars

While it may feel nice to be driving in a high-end car, the initial high price tag tends to drop dramatically compared to mainstream models. They tend to lose an average of 48% of their value after five years. With costly repairs and a high amount of supply in the used luxury car market, it makes it challenging to retain its value. 

Sports cars

Sports cars tend to hold their value like SUVs and trucks, with an average depreciation rate of approximately 22% after five years. However, there are specific models that tend to depreciate up to 50% in five years. So, while you may want to live life in the fast lane, be sure to research to see which make and model will hold up its value in the future.

An important tip: These are general guidelines that may not apply in all situations. You may consider seeking advice from an accountant or tax professional who can help you accurately calculate your specific car’s rate of depreciation.  

Comparison of car depreciation rates based on how the vehicle was acquired

Besides the type of car, you’ll want to consider whether a new, used or leased car will have the lowest depreciation rate. 

New cars

Although you may get the latest features and best technology in a new car, they are prone to having the highest depreciation rate within the first year. After the initial year, the depreciation rate may gradually decrease annually (we’ll cover that in detail below). So, if you anticipate trading in or selling your car in less than five years, you may want to think twice about purchasing a brand new car as you may get dinged with depreciation. 

Used cars

Buying a vehicle about a year old is a popular option since new cars tend to lose between 20% to 30% of their value within the first year. After the initial year, the depreciation rate slows down, so you may find better deals on older models. If you ever decide to trade in or sell your car, it’ll preserve a higher percentage of its value than buying a brand new car. 

Leased cars

Alternatively, leasing could be viable as the lease price factors in the depreciation cost. So, the retail price is the remaining value of the car. When your lease term expires, you can renew the lease, return the car, or purchase it. It’s also a good option for those who enjoy driving a different car every few years without having the hassle of finding a buyer.

How to calculate car depreciation per year

Generally, a new car depreciates between 20% to 30% in the first year. It can depreciate between 15% to 25% annually from the second year to the fifth year. By the fifth year, a car could lose up to 60% in value. 

Calculation example

Here’s an example of how to calculate a car’s depreciation for the first five years:

Original car price: $35,000

Car depreciation rates:
Year 1: 25% (1 - 0.25 = 0.75)
Years 2 to 5: 15% (1 - 0.15 = 0.85)

Formula:
Year 1: Original price x 0.75
Year 2: Year 1’s price x 0.85
Year 3: Year 2’s price x 0.85
Year 4: Year 3’s price x 0.85
Year 5: Year 4’s  price x 0.85

Calculation:
Year 1: $32,000  x 0.75 = $24,000 
Year 2: $24,000  x 0.85 = $20,400  
Year 3: $20,400  x 0.85 = $17,340
Year 4: $17,340  x 0.85 = $14,740
Year 5: $14,740  x 0.85 = $12,530

Following this calculation can help you estimate your car’s depreciation value and plan for future resale or trade-in. 

Note: This is a sample scenario and the numbers are based on averages. If you want to use it for tax purposes and CCA, a more detailed calculation must be made. You can find more information through the Government of Canada’s website.

7 Tips to retain your car’s value 

These are some ways you can minimize the rate at which a car will depreciate:

Keeping copies of your maintenance records

Whenever you go for routine maintenance for an oil change, tire pressure check, or other tune-ups, you'll want to hold onto the receipts. This can prove to the dealership that you’ve followed the maintenance schedule. 

Focus on mileage usage

Low mileage usually means lower wear and tear. Try to avoid making unnecessary trips to keep the odometer readings low.

Repair any damages promptly

If there are scratches or structural damage, you’ll want to fix them immediately. Otherwise, they’ll lower the car’s value. 

Avoid modifications or customization

Sticking with classic colours will help with the resale value. Also, dealerships don’t like to handle modifications as they’ll need to remove them and inspect for any damages. 

Choose a popular car brand

Certain car brands have proven reliability and have been shown to retain their resale or trade-in value. 

Getting rust protection

It may be worthwhile to rust-proof your car as it could be a selling point for potential buyers. 

Keeping your car clean

Washing, cleaning or detailing your car are standard practices to ensure it looks spotless. It’ll also prevent dirt buildup and rust accumulation. 

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