Corporate tax

What You Need To Know About Vehicle Expenses

The CRA has stipulated numerous and convoluted regulations on vehicle expenses. Whether you’re an employer or an employee an in-depth understanding of vehicle expenses is crucial when filling out your tax returns.

In this article we try to simplify this by using a number of examples to better inform you when it’s a good idea to make the company car available to your employees and when it’s not.

If you’re an employee, you should know which vehicle expenses are deductible when you use your own personal vehicle to meet your employment obligations.

Taxable Benefits

An employee qualifies for a taxable benefit when the employer or someone related to the employer makes a company car available to them or someone related to them for personal use.

Note that the CRA considers the use of a company car to travel from home to work and vice versa as personal use and taxable benefits are treated as income.

There are two primary taxable benefits you need to be aware of;

  1. Standby Charge Benefit
  2. Operating Cost Benefit

Both these taxable benefits will have to be added to the employee’s income in order to determine the total amount of income that will be subject to source deductions.

Standby Charge Benefit

Simply put a standby charge is a recognition that the employer has made an automobile (primarily meant for business) available to the employee for personal use.

There are two special formulas that are used to determine how much standby charge benefit should be added to the employee’s income.

Only one of the formulas is used to determine the standby charge benefit.

To determine which formula to use, you have to consider two factors:

  • Is the car fully owned and paid for by the employer?
  • Is the car leased by the employer?

Calculating the Standby Charge Benefit When The Car Is Fully Paid For and Owned By The Employer

Here’s the formula:

2% x total cost of the car (including fees, HST/GST) x No. of months the automobile has been made available to the employee

Calculating the Standby Charge Benefit When The Car Is Leased By The Employer

Here’s the formula:

2/3 x monthly lease costs (excluding insurance) x No. of months the automobile has been made available to the employee by the employer

Getting confused?

Fine, let’s use some real numbers.

Jane owns ABC, a company that sells maple syrup. Jane has decided to make one of the company cars available to Peter to help ferry him between home and work throughout the year. There are two company cars that she could make available to him; a Nissan sedan ($34,000) which has been bought and fully paid for by the company or a Toyota sedan which has been leased to the company for $516 a month. Jane asks Peter to decide which of the two automobiles he prefers.

Standby Charge Benefit for the Nissan:

2% x 34,000 x 12 = $8,160

Standby Charge Benefit for the Toyota:

2/3 x 516 x 12 = $4,128

Assuming that Peter loves himself more than the Canadian Government, he’ll pick the Toyota since it has the lower standby charge benefit of the two. Remember that a standby charge will increase Peter’s total taxable income, so it’s prudent to keep it as low as possible.

Speaking of low as possible.

It’s also possible to reduce the standby charge even further.

Here’s how.

After 1 whole year of use the trip log shows that Peter has logged a total of 40,000km. 30,000km travelled was business related and the other 10,000km was for Peter’s personal use.

According to the CRA if:

  • More than 50% of the logged distance is business related or
  • Personal mileage does not exceed 20,004km or an average of 1,667km a month

These can be factored into the formula to reduce the standby charge even further. So in Peter’s case since he meets both requirements let’s go ahead and see how much standby charge benefit he’ll receive from Jane.

The formula changes a little bit:

2% x total vehicle cost x No. of months automobile has been made available x (total kms used for personal use/20,004)

So,

2% x 34,000 x 12 x 10,000/20,004 = 4,079 (for the Nissan Sedan)

Or

2/3 x 516 x 12 x 10,000/20,004 = 2,063 (for the Toyota Sedan)

You notice that this reduced standby charge is certainly less than what we had before.

Operating Cost Benefit

The operating cost benefit is the other taxable benefit you need to think about when considering personal vs business use of the vehicle.

The CRA considers all automobile associated expenses as operating expenses. We’ve listed some of them below:

  • Gasoline
  • Maintenance and Repairs
  • Tires
  • License and Insurance
  • Oil

Note that parking charges are not seen as operating costs.

Like with the standby charges, there are two ways to calculate operating costs:

Assuming that the automobile was used more than 50% of the kms logged for personal use, the formula to use is:

No. of km travelled x $0.27 per km (this rate is determined by CRA and changes every year)

The other formula is much simpler and is only used when 50% or more of the kms logged were for business purposes:

50% x Standby Charge Benefit = Operating Cost Benefit

Peter certainly qualifies for the second formula since he only logged 10,000km for personal use which is less than 50% of the total kms travelled (40,000km).

So Peter’s operating cost benefit will be 50% of his standby charge benefit of $2,063.

50% x $2,063 = $1,031.50

 

Remember the total taxable benefit is calculated like this:

Standby Charge Benefit + Operating Costs Benefit = Total Taxable Benefit

Therefore;

$2,063 + $1,031.50 = $3094.5 = Total Taxable Benefit

Deductible Vehicle Expenses

The example above does not address a situation where the employee owns a vehicle and uses it for business purposes.

So, if you’re using your own car to run business related errands do you qualify for deductible vehicle expenses?

Well, you do. But you’ll need to meet some contingencies first:

  • You had to work away from your employer’s business premises.
  • You met your own vehicle expenses and didn’t get reimbursed by the employer. You can read more about this here.
  • You have a copy of Declaration of Conditions of Employment.
  • You never received a non-taxable allowance for motor vehicles expenses.

Some of the deductible vehicle expenses include:

  • Insurance
  • Fuel
  • License and registration fees
  • Capital Cost Allowance (also known as depreciation)

Disclaimer

All information provided on this page is intended for general purposes and we will not be held liable for any loss that may arise from the use of the information thus provided. If you’d like we can schedule a free consultation with us here.

CRA Penalties and interest

Let’s get the simple stuff out of the way first:

  • Your tax return is considered late if it is not received by the due date and a penalty applies
  • If you don’t owe or are owed a refund there is no penalty
  • Penalties are fixed and apply to returns that are late; interest is variable and depends on how long the owing amount was outstanding

Late-filing penalty

If a taxpayer owes tax for 2016 and does not file a return by May 1, 2017, the CRA will charge a late-filing penalty. The penalty is 5% of your 2016 balance owing, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 months (i.e. as high as 13%)

 

If a taxpayer is charged a late-filing penalty on their return for 2013, 2014, or 2015 their late-filing penalty for 2016 may be 10% of their 2016 balance owing, plus 2% of their 2016 balance owing for each full month your return is late, to a maximum of 20 months (i.e. as high as 50%).

Conclusion:

  • Always try to file and pay by the deadline
  • Even if you can’t pay on the deadline, file your return by the deadline
  • If you can’t afford to pay the entire amount owing you or you representative call CRA’s debt management call centre at 1-888-863-8657 from 7 a.m. to 11 p.m., Eastern time.

 
CRA prescribed rates can be found here

Starting a business

 

Starting a business is a daring and demanding endeavor and requires a lot of time and effort. Before you can turn your ideas into reality, you must assess the risks and rewards of the venture, and take into account many factors such as capital requirements, sources of funding, competitiveness of the industry in which you will be operating, and the core competencies which will set you apart from the competition. A professionally formulated business plan can assist you in identifying your business’ strengths and weaknesses, evaluating its financial viability, and securing financing. At MKG, we are accounting professionals who can turn your business ideas and crude data into a well-articulated and meaningful business plan and increase your business’ chance of success. It is worth mentioning that business plans are not just for start-ups; established and especially growing businesses use business plans in order to communicate their vision to their employees, prepare financial forecasts, raise capital, and compare their actual and planned performances.

The next steps

Once you have created a business plan and secured financing, you will need to decide the legal structure of your business. This is a complex issue and needs careful consideration as it will affect you and your business’ liabilities, and income tax consequences.
There are several ways in which one can carry out your business in Canada: as a sole proprietorship, a corporation, or a partnership. Each method has some advantages and disadvantages.
For example as a sole proprietor, you do not have to file a separate corporate tax return every year (which can be costly) and report your business income as part of your personal tax return; this allows you to claim any business losses on your personal tax return. This is an enormous opportunity for start-up businesses which are more likely to incur losses initially as it will allow the owner to reduce his or her personal taxes to the extent they incurred losses in their business. Incorporated businesses, on the other hand, cannot transfer their losses to the owners; although they may carry the losses forward to reduce their taxable income in the future. A disadvantage of sole proprietorships is that they are considered a separate legal entity and the proprietor(s) stand personally liable should their business be sued for damages or misconduct.
Incorporating your business involves some setup costs such as name searches and incorporation fees and requires a separate corporate tax return to be filed every year. An incorporated business is also subject to closer scrutiny by the provincial or federal regulatory bodies. For most profitable businesses, however, the tax savings outweigh the initial and ongoing costs of incorporation. Once incorporated, your business becomes a separate legal entity which means that you and your personal assets are protected from liabilities incurred by your business. It should be noted however, that most banks require a personal guarantee on business loans which means that should your business default on the payments, you will be personally responsible for the loan. Aside from the legal liability protection that a corporation offers, there are some other noteworthy advantages such as the Capital Gains Exemption. Assuming that you or your family members are the shareholders of an incorporated business, each shareholder is entitled to $ 800,000 Capital Gains exemption on disposal (i.e. when they sell the shares), a fantastic opportunity for those who want to retire or pass on the torch to their children. Another advantage of incorporating your business is the ability to split the income generated by your business with family members to the extent of their involvement in the business.

One of the most attractive features of an incorporated business is the ability to retain a portion of the earnings in the business. Since corporations enjoy lower tax rates and – unlike sole proprietorships and partnerships- have the option of maintaining all or a portion of their earning in the corporation, the shareholder(s) personally, pay tax only on amounts received as salary or dividends from the business. This is an enormous opportunity for those businesses whose income fluctuates from year to year or those whose income exceeds the needs of the shareholder(s).

Whether you choose to conduct your business as a sole proprietorship or corporation or if you need to assess which structure suits your needs, we are here to help. We, at MKG, can provide you with the relevant facts about your business’ financial performance to assist you in making sounds business decisions. If you choose to incorporate, we can guide you through the process, from names searches to filing the governmental paperwork and obtaining certificates.

Canadian Tax system

 

 

In Canada, most types of income (employment, commission, gratuities, business, capital gains, investments, etc.) are taxable and must be reported in the year in which they were earned. This includes worldwide income for individuals who are considered Canadian residents for tax purposes. Generally Canadian residents are those with substantial residential ties to Canada such as owning a home or having immediate family members in Canada. Canada employs a self-assessment tax system which means that it is the taxpayers’ responsibility to report their own income, claim their deductions and credits, and file their own tax returns based on the rules set out in the Income Tax Act.

Depending on their source of income, taxpayer may be entitled to some deductions. Business income earners, for example, can generally deduct all reasonable expenses they incur in order to generate income. All taxpayers, regardless of their income source, can deduct their eligible RRSP contributions in the year in which they were made. Tax payable is further reduced by a series of refundable and non-refundable tax credits. These credits include age, disability, charitable and political donations, universal child care, and public transit credits. The distinction between deductions and credits is that deductions reduce your taxable income while tax credits reduce your tax payable. This means the money a taxpayer saves by deducting a deductible expense depends on their marginal tax rate so if you are a higher earner with a 29% marginal tax rate, your deductions are also applied at the same rate. On the other hand, eligible taxpayers all receive the same amount by claiming their tax credits. For example every person who purchased public transit passes will receive a 15% credit regardless of their income and marginal tax rate. Therefore for taxpayers whose marginal tax rate is higher than the lowest tax bracket, deductions result in more tax savings than tax credits. The difference between refundable and non-refundable tax credits is that you can only reduce your taxable income to zero by applying a non-refundable tax credit. Any overages will not result in a refund. However you will receive a refund for your refundable tax credits once they have reduced your taxable income to zero. This is an important distinction for lower and middle income earners as most credits can be carried forward and should be applied only if the tax payer benefits from them in the current year. Otherwise they should be carried forward.
Some of the assistance programs provided by the government such as the Universal Child Care are also considered benefits and must be included in the recipient’s income. Others such as social assistance and Canada Child Tax Benefit are non-taxable, although social assistance is included in income but also receives a matching deduction.

Income tax returns must be filed no later than April 30 following each taxation year. In some circumstances such as when a taxpayer carries out a business, the deadline is extended to June 15 following each taxation year. A 5% penalty and a 1% monthly interest are charged by both the federal and provincial governments if the tax return is filed late. Penalties are increased for those who repeatedly miss the deadline. Those who expect a refund will not be charged interest or penalties.