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TAXATION

Operating an automobile for business and
personal use has tax consequences.

Purchasing or leasing an automobile in the company
name and allowing employees to drive the
automobile has tax consequences that may require
owner-managers to add a taxable benefit to the
employee’s T4.

CRA Definition of Automobile

For there to be a taxable benefit, the employer must
first determine whether the vehicle is an automobile
under the Income Tax Act. The Canada Revenue
Agency (CRA) defines an automobile as “a motor
vehicle that is designed or adapted mainly to
carry individuals on highways and streets and has
a seating capacity of not more than the driver and
8 passengers.”

This definition of an automobile [paraphrased from
248(1) from the Income Tax Act] does not include
“a van, pick-up truck, or similar vehicle” that:

  1. can seat no more than the driver and two passengers,
    and in the year it is acquired or leased is used
    primarily to transport goods or equipment in the
    course of business, or
  2. in the year it is acquired or leased, is used 90% or
    more of the distance driven to transport goods,
    equipment, or passengers in the course of business;
    or
  3. pick-up trucks that you bought or leased in the tax
    year that:
    a) you used primarily to transport goods, equipment,
    or passengers in the course of earning
    or producing income
    b) you used at a remote work location or at a special
    work site that is at least 30 kilometres away
    from any community having a population of at
    least 40,000.
Restrictions on Deductibility

Vehicles that fall within this definition of an “automobile”
are subject to a maximum capital cost allowance
addition (available for future capital cost allowance) of
$30,000 plus HST. This limitation imposes a significant
constraint on many business owners’ primary motivation
for purchasing the vehicle in the corporate name.
Vehicles such as king cab trucks that do not fall within
the definition of “automobile” are not subject to such
a restriction since they are considered necessary for
the business and are not considered “luxury vehicles”.
There are also restrictions imposed on leased automobiles.
Generally, monthly lease costs for automobiles
are restricted to $800 plus HST.

Taxable Benefits

In addition to the restrictions on the deductibility of
annual depreciation (or leasing costs), users of such
vehicles are also deemed to have received a taxable
benefit from the corporation for the use of the vehicles
for non-business purposes.

For example, assume an owner-manager purchases
a high-end SUV in the company name but the owner-
manager’s spouse uses it primarily (i.e., more than
50% of the use) for non-business purposes. Assume
also that the base price of this vehicle is $90,000 and
the overall cost of owning the vehicle, once HST is
added, is $101,700. The standby charge to the employee
is calculated at 2% per month of the total cost of the
vehicle. Thus, the standby charge for the employee
is calculated at $101,700 at 2% ($2,034) per month
or $24,408 per year. The standby charges would be
reduced in cases where the vehicle is used primarily for
business purposes and annual personal driving does
not exceed 20,000 kilometres.

On top of the standby charge, an additional operating
benefit of 26 cents per personal kilometre driven is
taxable in the hands of the employee. In the case where
the vehicle is primarily used for business purposes,
the operating benefits could be reduced to 50% of the
standby charges if the benefit results in an amount
lower than otherwise calculated.

(Standby charges for a lease can be expensive as well.
A monthly lease cost of $1,350 over 84 months creates
a standby charge for 12 months of $10,800 plus an
operating expense benefit as mentioned above.)

Owner-Manager’s Use of Vehicles

Owner-managers may believe they are not subject to the
available-for-use rules because they are shareholders of
the corporation and not employees. The CRA has made
it clear that owner-managers are subject to the same
taxable benefit as employees as indicated by the CRA’s
reference to archived IT63R5 Benefits, Including Standby
Charge for an Automobile, from the Personal Use of a
Motor Vehicle Supplied by an Employer — After 1992.
Paragraph 18 reads as follows:

  • Shareholder Benefit
  • 18. The above guidelines may generally be applied
    to a shareholder of a corporation. Subsection
    15(5) provides that, for the purpose of
    subsection 15(1), the value of the benefit to
    be included in a shareholder’s income when
    an automobile is made available to such a
    person (or to a person related to that person)
    by a corporation, whether or not resident or
    carrying on business in Canada, is calculated
    on the assumption that subsections 6(1), (1.1)
    and (2) apply with such modifications as are
    required in the circumstances, and as though
    the references therein to “employer” were read
    as references to “corporation.”

    Working from Personal Residence

    Many owner-managers may work from their principal
    residence and thus have access to the vehicle 24 hours
    a day. The question is: “Does the close proximity of
    the vehicle mean that it is available for personal use
    and therefore a taxable benefit must be added to the
    owner-manager’s income at the end of the year?”

    CRA: There is no taxable benefit if the
    automobile is operated for business use only.
    The Answer According to the CRA

    “An automobile is available to your employee if he or
    she has access to or control over the vehicle. It includes
    any part of the day, weekends and holidays during the
    calendar year.” (This suggests that, since the vehicle is
    parked at the place of residence and is available 24 hours
    a day — 365 days a year, there is a taxable benefit.)

    “If your employee does not use the company’s automobile
    for any personal driving, there is no taxable benefit,
    even if the automobile is available to your employee
    for the entire year. This applies as long as the kilometres
    driven by your employee are in the course of his or
    her employment duties and the vehicle is returned to
    your (business) premises at the end of his or her work
    day.” (This suggests that, if the owner-manager can
    establish that they do not use the vehicle for personal
    use at all and park it at the “corporation’s” premises
    [also the owner-manager’s principal residence] then
    there may not be a taxable benefit.)

    Keep Detailed Records

    Convincing taxation authorities that the vehicle is not
    used for personal use will require due diligence and
    good record keeping since the CRA will take into consideration
    many factors when determining whether
    available-for-use benefits should be added to income.

    The first line of defence is a complete log book. Record
    the odometer reading as at January 1 of and December
    31 of each calendar year to establish the total
    annual distance the vehicle has been driven. Log each
    business trip taken plus a description of the purpose.
    Hypothetically, the number of kilometres driven for
    business trips and the total kilometres driven should
    be the same.

    Although it is highly unlikely an owner-manager
    would purchase or lease an expensive “toy” and use
    it primarily for work purposes, the CRA may start
    to review the purchase of vehicles to ensure they are
    indeed “work vehicles.” Additional calculations and
    circumstances will alter the available-for-use add-on,
    whether for a purchased or leased vehicle. But, as our
    hypothetical taxable benefit examples demonstrate, the
    additional taxable benefit will push the employee (i.e.,
    owner-manager) into a higher tax bracket and thus
    bring closer scrutiny by the CRA.

    Consult Your CPA

    Calculation of available-for-use benefits is complicated
    and may be somewhat offset by taxable deductions
    within the corporation. If your business is considering
    purchasing or leasing a vehicle that will be operated in
    the gray area between business and personal use, consult
    your CPA to ensure you understand the potential
    personal tax consequences.

     

    Disclaimer

    The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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