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If you're considering buying a new or used vehicle in Ontario and currently own one, you're likely wondering whether you should trade it or sell it. It's a tough choice, as each has benefits.
Trading your current vehicle can come with great tax benefits and an easier transaction, but selling it often nets a higher return. You also need to consider other variables before deciding whether to trade or sell your current vehicle.
Below, we'll dive into this decision, outline the pros and cons and show you how to effectively determine your car's trade-in value in Ontario.
Tax Benefits of Trading a Vehicle in Ontario
Trading in a vehicle in Ontario is likely the easiest way to get a fair value for your vehicle without the stress of a private sale. When selling privately, you're stuck fielding countless texts and messages as well as dealing with tire kickers who really have no interest in buying a vehicle.
Trading your vehicle in Ontario has some downsides. For example, your vehicle's trade-in value in Ontario is generally lower than the private party value because the dealership still has to make a profit. But the big upside that often makes up for this lower value is what you'll save on sales tax by trading your vehicle.
In Ontario, you must pay provincial and federal taxes on a vehicle purchased from a car dealership. Combined, these are called the harmonized sales tax (HST), and you only pay HST on the price of the vehicle minus your trade-in. If you sell your old car privately and buy a new or used car, you’ll pay the full HST. In Ontario, the HST is 13%.
For example, if you sold your car and purchased a 2018 Honda CR-V for $20,000, the 13% HST would cost you an extra $2,400 in taxes, bringing the total price to $22,400. If you traded in a vehicle and got a $10,000 credit for your trade, you'd pay 13% on only $10,000, bringing the HST down to $1,300, saving you $1,100.
Essentially, you're actually getting $11,300 for your trade-in once you consider the tax savings. Compare that number to the private party value to decide if it's worth your time to sell your car yourself or if you’d rather trade it in.
How Dealers Determine Trade-In Value
Valuating a trade-in vehicle has many factors, ranging from the vehicle's condition to what tires are included in the trade-in package. Dealerships must also consider the vehicle's current market. Let's review some of the variables dealerships consider when evaluating your trade-in and how each variable impacts your car's value.
Market Value
Market value will be one of the first things the dealership looks at when pricing your trade-in. This is the car's resale value at the time of the trade-in, based on its model year, desirability, optional equipment, and other factors. Where do dealerships get this information? Several places. including:
- Canadian Black Book: This site is an online tool dealerships can use to determine the current wholesale value of their trade-in vehicle. They can enter your vehicle identification number and see the typical wholesale rate for your vehicle so they remain competitive without overpaying. Fortunately, you can also access this system and enter your VIN and other information to get a ballpark trade-in value in Ontario.
- Canada Red Book: Canada Red Book from Carfax is a more exclusive system used by dealerships, insurance companies, and others needing more precise vehicle valuation. unlike the Black Book, Red Book is not open to the general public, as it requires a $249.99 annual fee per user. Red Book also offers retail value and manufacturer-suggested retail price (MSRP).
- Anecdotally: Finally, dealers can look at current pricing online and use this anecdotal evidence to determine seasonal pricing fluctuations. For example, if you're trading a sports car in the middle of the winter, the demand may be lower, meaning the dealer must reduce the sale price or let it sit in the inventory until demand returns in the warmer months.
Dealerships will also consider any upgrades you've made to the vehicle that increase its value, such as custom wheels, an upgraded paint job, or a custom audio system.
Vehicle Condition
Car dealers will also consider your trade-in vehicle's mechanical and physical condition. The dealer will pull a vehicle history report on your car and check for any accidents or other potential red flags. If your vehicle was in a serious accident or has other issues in its history — like potential flood damage — it could significantly lower the trade-in value in Ontario.
The dealer will also perform a full visual inspection of the body and interior, looking for dents, dings, rust, scratches, rips, and other damage. These issues would require reconditioning, which adds to their cost and decreases the vehicle's value.
The mechanical condition of the vehicle also matters during a car valuation. The dealership will usually test drive the vehicle and check for obvious mechanical issues with the fluids, filters, tires, brakes, and other easy-to-check items. The dealer then adds up the mechanical reconditioning the vehicle would need before they could sell it.
The dealership will deduct its estimated body, interior, and mechanical reconditioning costs from its trade-in offer. If the dealership determines the reconditioning costs are too great and will wholesale the vehicle or send it to auction, this can result in a far lower offer for your trade.
Included Accessories
Any accessories you plan to leave on the vehicle after trading it can impact your trade-in price because they can make the vehicle more marketable for the dealership.
You want to let the dealership know you're including items like a roof rack and cargo box on your large SUV or all-weather floor mats in your sedan in the trade.
Some Canadian provinces require winter tires, and others strongly recommend them. This makes them an important part of a vehicle valuation.
If your trade-in includes a set of summer and winter tires, let the dealer know. This will make it far easier for the dealership to market it and could increase your offer. If those winter tires are already mounted on wheels and ready for installation, that's even better.
If the dealership won't boost your trade-in value in Ontario based on your included accessories in its trade-in valuation, you can remove them and install them on your new car if they fit. If they don't fit, you can sell them for extra cash.
Dealership Demographic Fit
Dealerships must also consider how your trade-in vehicle fits their target demographic. For example, a two-year-old Ford F-150 will likely get limited interest from buyers at a BMW dealership.
That BMW dealership knows it may be forced to wholesale the F-150 to a more mainstream dealer or take it to auction, resulting in a lower sales price for the dealer, which will lower your trade-in value.
What Dealerships Do With Your Trade-In Vehicle
After the trade-in process is complete, the dealership's service department will put the vehicle through a presale inspection. During this important inspection, the dealership's technicians will look over the vehicle and determine whether it needs any deeper mechanical, body, or electrical repairs.
The technician will deliver their report to the service manager or whoever handles quoting presale repairs to the sales managers. The service manager will then work up a repair quote for the sales managers, who will then decide if it's worthwhile to recondition the vehicle.
If it doesn't make financial sense to recondition the vehicle, the dealership will either sell the vehicle at wholesale price to another dealership or send it to auction.
If it does make financial sense to recondition it, the dealership will perform all repairs and place the vehicle for sale.
How Dealerships Use Incentives to Enhance Trade-In Offers
Dealerships can earn more profit by adding GAP insurance or extended warranties to their deals. They can also turn to manufacturer or financing incentives to increase their revenues. These incentives allow the dealership to move money around and make your trade-in offer look virtually unbeatable.
For example, the dealership gives you a $10,000 offer for your trade-in, but you already had $11,000 set as your minimum acceptable offer. The dealership sees this as your hot button to complete the deal, so they take a portion of the financing reserves they have on the vehicle you're purchasing to pad your trade-in value.
What are financing reserves? When a dealership sets up your financing, the lenders will give the dealer "buy" rates. These are the lowest interest rates the lender will offer you. The dealership can then add to that interest rate—typically by one to two percentage points. That additional interest is the finance reserve and is pure profit for the dealership.
For example, say you are financing a $25,000 new car, and the bank offers a 4% "buy" rate. If the dealership wants extra profits, it can then sell you a 6% interest rate and earn a 2% finance commission on the loan. On a 60-month car loan, that's $1,374 in profit the dealership can use to cover the extra $1,000 you wanted for your trade-in. The dealership still profited an extra $374 and met your $11,000 minimum.
You would likely never know the "buy" rate was actually 4%, and you would feel satisfied enough to accept the deal with the $11,000 you got on your trade.
Dealerships can also do this with manufacturing incentives. Many automakers offer new-car dealerships unadvertised incentives that they can use to pad profit or reduce a car's MSRP to close a deal. If the new vehicle you're shopping for has a $1,000 unadvertised incentive, the dealership can use that incentive to balance out the extra $1,000 added to your trade-in value.
Get Rid of Your Old Car the Easy Way at Clutch
Selling a used car can be a hassle. You've got to advertise it, field questions from potential buyers, meet people for test drives, lose precious time to people who never show up, and more. And once it finally does sell, you get hit with the paperwork. Why go through all that headache when Clutch can take your vehicle on trade and put you in a quality pre-owned vehicle? Or even if you are just looking to sell your vehicle quickly and hassle free without purchasing another one, we are still happy to take your vehicle today!
You can find out your vehicle's trade-in value without setting foot in a dealership with our trade-in estimator. Simply enter a little information about your vehicle, and our algorithm will look at the current market conditions and analyze your vehicle's details to give you a firm offer.
Then, you can shop our range of quality pre-owned vehicles, choose the one you like, and complete the purchase process completely online. We'll deliver your new car and pick up your trade-in at the same time. Plus, we’ll handle all the paperwork for you.
As for your new car, all Clutch vehicles purchased online include a 90-day or 6,000-km limited warranty and a 10-day risk-free test period. If you don't love your Clutch pre-owned vehicle in the first 10 days, you can return it for a full refund or exchange it for another vehicle.
