How much are you REALLY spending on self-storage?
Understanding Storage Choices: Shipping Containers Tax Guide for Canadian Businesses
Every local business in Canada needs to make the most of every dollar spent. One of the choices they often face is: Where should they store their goods? They could buy or finance a shipping container or rent a space at a self-storage facility. But which option gives the best bang for their buck? Which option is best for taxes and how much are you really spending on your current storage solution? We think the numbers might be shocking.
In this guide, we'll break down the tax advantages of owning a shipping container for storage for Canadian businesses. Whether you're considering a shipping container or a rental storage space, we've got the insights you need to make the right choice for your local business.
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Capital Cost Allowance (CCA):
- When you finance or purchase a shipping container, it's treated as a depreciable asset. This means you can deduct a portion of its cost each year. The amount you can deduct is based on prescribed rates set by the Canada Revenue Agency (CRA). This deduction is called the Capital Cost Allowance (CCA).
- The specific CCA class that the shipping container falls under and the associated rate would determine the amount you can deduct each year. The CRA's guidelines would provide details on the appropriate CCA class for shipping containers.
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Interest Deductibility:
- If you finance the purchase of a shipping container, the interest on that financing could be deductible for tax purposes as a business expense, provided the container is used to earn business income.
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Renting Storage Space:
- Rent or lease expenses for storage space are generally fully deductible in the year they are incurred since they are considered current operating expenses.
- There's no need to depreciate these costs over time, unlike with purchased assets.
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Cash Flow Implications:
- Renting storage space may require less upfront cash compared to financing or buying a shipping container, which might be beneficial from a cash flow perspective.
- However, once you've paid off a financed container, you might have lower ongoing costs compared to continuously renting storage space.
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Flexibility:
- Renting storage space might offer more flexibility if your storage needs change frequently. For instance, it might be easier to expand or reduce rented space compared to buying or selling shipping containers.
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Sale of the Asset:
- If you later sell the shipping container, there may be recaptured CCA if the sale price is more than the undepreciated capital cost, or a terminal loss if the sale price is less. This could have tax implications.
It Pays to Own Shipping Containers
What if I told you that owning a $5000 shipping container would pay you $2400 over the course of 7 years and save your business over $27,000. It's no joke! Now that we've provided you with a basic understanding of the various tax advantages of buying a shipping container, let's dig into the numbers behind how you can get paid $2400 to own a storage container without renting it out.
Shipping containers are a phenomenal business asset. Portable, durable, rugged and long lasting, they have an expansive array of uses and last seemingly forever. In a world where almost everything is constructed to have a 5-8 year lifespan, these massive steel boxes pay off for the long run and offer tax incentives like no other asset in the world.
Tax Depreciation:
We're writing this from Canada where shipping containers fall into the class 8 depreciable tax asset class. That means they offer a capital cost allowance of 20%. Here is a quick breakdown of the tax depreciation of 20' shipping container purchased for $5000 over 7 years.
- Year 1: Half-year rule: $5,000 × 20% × 0.5 = $500 Undepreciated Capital Cost (UCC) end of Year 1: $5,000 - $500 = $4,500
- Year 2: Depreciation: $4,500 × 20% = $900 UCC end of Year 2: $4,500 - $900 = $3,600
- Year 3: Depreciation: $3,600 × 20% = $720 UCC end of Year 3: $3,600 - $720 = $2,880
- Year 4: Depreciation: $2,880 × 20% = $576 UCC end of Year 4: $2,880 - $576 = $2,304
- Year 5: Depreciation: $2,304 × 20% = $460.80 UCC end of Year 5: $2,304 - $460.80 = $1,843.20
- Year 6: Depreciation: $1,843.20 × 20% = $368.64 UCC end of Year 6: $1,843.20 - $368.64 = $1,474.56
- Year 7: Depreciation: $1,474.56 × 20% = $294.91 UCC end of Year 7: $1,474.56 - $294.91 = $1,179.65
By the end of Year 7, the Undepreciated Capital Cost (UCC) for the shipping container is $1,179.65. This amount would be the value used to calculate the CCA for Year 8 and subsequent years, should you continue to hold onto the asset.
So a $5000 shipping container purchased by a business actually only cost them $1,179.65 after year 7 of ownership. This alone is great considering we just showed you how turn what was a liability into an asset but it gets even better when we compare the actual rate of depreciation vs the Undepreciated Capital Cost Allowance.
Rate of Depreciation:
When a shipping container is repurposed as a self-storage device, its rate of depreciation is much lower than if it is used as an international transport device. This is because the wear and tear and stresses placed on the container are minimal when compared to the rigours of international transport.
Several factors will affect the rate of depreciation for a shipping container used as a self-storage device:
- Location and Exposure: If the container is located outdoors and exposed to the elements, it might depreciate faster than one stored under a shelter or indoors.
- Maintenance: Regular maintenance, like repainting or rust treatment, can extend the lifespan of the container.
- Frequency of Use: If the doors are frequently opened and closed or if heavy items are often moved in and out, the container might wear faster.
- Quality: The initial condition and quality of the container when it was transitioned to storage use will also factor into its depreciation.
Calculating the actual rate of depreciation of a shipping container.
A shipping container repurposed for self-storage should easily last 25-40 years, given that it's not exposed to the intense conditions of ocean transport. This means actual annual depreciation rate for a new contain can be assessed at between 2.5% to 4%.
Shipping Containers as Class 8 Depreciable Assets
To the best of our knowledge, a shipping container is considered a class 8 depreciable tax asset at 20%. Assuming that the actual rate of depreciation for a shipping container used for self storage is 4%, there is a 16%+ difference between the UCC and actual depreciation rate that should make any savvy investor salivate.
Actual rate of depreciation vs tax depreciation of a class 8 asset Comparison in Canada
The following is based on UCC of 20% (class 8) vs annual Straight-line depreciation of 4%
Resale Value vs Class 8 Tax Depreciation Value (UCC)
| Year of ownership | Asset Value | Class 8 Tax Depreciation Value (UCC) | Profit After Sale | Storage Rental Liability ($300 per month) | Net Difference |
| Year 1 | $4,800 | $4500 | $300 | -$3600 | $3,900 |
| Year 2 | $4,600 | $3600 | $1,000 | -$7,200 | $8,200 |
| Year 3 | $4,400 | $2880 | $1,520 | -$10,800 | $12,320 |
| Year 4 | $4,200 | $2,304 | $1,896 | -$14,400 | $16,296 |
| Year 5 | $4,000 | $1,843.20 | $2,156.8 | -$18,000 | $20,156.80 |
| Year 6 | $3,800 | $1,474.56 | $2,325.44 | -$21,600 | $23,925.44 |
| Year 7 | $3,600 | $1,179.65 | $2,420.35 | -$25,200 | $27,620.35 |
Considering the variance between the rate of depreciation and the Class 8 Tax Depreciation Value, after owning a container for 7 years, the cost to purchase becomes $1,179.65 while the resale value will remain at around $3,600. As a busienss owner, you will have made $2400+ in profit simply by buying a shipping container. If you are replacing your existing self-storage space, you will see a net difference of over $27,000 turning what was a significant liability into an asset. :) Thank you Rich Dad!
