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.
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;
- Standby Charge Benefit
- 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
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.
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)
2% x 34,000 x 12 x 10,000/20,004 = 4,079 (for the Nissan Sedan)
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:
- Maintenance and Repairs
- License and Insurance
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
$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:
- License and registration fees
- Capital Cost Allowance (also known as depreciation)
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.