Car Buying Tips

What Are the Tax Benefits of Trading in Your Car vs Selling It Privately?

If you’re contemplating buying a new vehicle and wondering what to do with the old one, most people will end up either trading it in or selling it privately.

At first glance, the benefits of both might be obvious. A trade-in is less of a headache, but it also means less money in your pocket. Selling privately will put more money in your pocket, but it will take you time and effort to sell your vehicle to a private buyer.

Those obvious differences aside, you’ll also want to consider the tax implications. Depending on the province you’re in, trading in a vehicle could reduce the amount of tax you’ll end up paying on your next vehicle.

For example, in the province of Ontario, vehicle purchases (new and used) are subject to the 13% HST (Harmonized Sales Tax). Imagine, for example, that your next vehicle comes with a $20,000 price tag. You’ll end up paying 13% ($2,600) on top of that in HST. However, if you have a trade-in that’s worth $10,000, then the value of the trade-in will be deducted from the cost of your new vehicle, before HST is calculated. In other words, you’ll be charged 13% HST on $10,000, instead of $20,000, which means you’ll only pay $1,300 in taxes, which is a significant savings.

That said, you’ll have to determine whether trading in your vehicle makes sense in your particular case. For example, if in the scenario mentioned above you can sell your old vehicle for $15,000 (rather than trading it in for $10,000), then pocketing the extra $5,000 in profit would make more sense than saving $1,300 in taxes. Even so, selling your vehicle privately takes time, patience, and negotiating skills, so it still might be worth trading your car in to make it more convenient for yourself. Every case will be different, so do your math before you make a decision.