A common trend among many small business owners is having a company car. What a lot of small business owners do not realize is that if they make their car accessible to employees then they may have to pay additional taxes. Some applicable taxes that are levied are standby charges, operating cost benefits, taxable automobile allowance, and tax free vehicle allowance. These taxes could have significant impact on your taxes owing which is why you should fully understand the costs when purchasing a company vehicle.
When lending your company car out to employees, make sure it is for business purposes. Personal use of a company car can result in a taxable benefit included in the employee’s personal income for the year. A simple lunch trip to Tim Horton’s for coffee will be seen as personal use and will have to be accounted for when calculating ones personal income.
Stand by charges is the benefit that employees get when a business automobile is made available to them for personal use any time of the day, month, and year. If the car is made available but not used, then there will be no taxable benefit included on the employee’s income. This should be noted on the individuals T4 slip when issued at year end.
A Standby charge can be calculated as follows:
A/B x [2% x (C x D)]
A = the personally used KM’s with the corporation owned vehicle (e.g. 4,000 km)
B = 1,667 KM x (total days available/30) (e.g. 360 days available/30)
C = Original cost of the vehicle which includes HST
D = total days available / 30 (e.g. 360 days available/30)
For example Janice owns her own business XYZ company. She has registered her car into the corporation’s name. She has access to the car 365 days a year. Janice records all of her transactions in a log book. She notices that during the year her total millage was 20,000 km. Janice also notices that 1,000 of the total km was used for personal use. The car was purchased in 2012 for $27,000 HST included. Janice wants to know what her year end standby charge would be.
= A/B x [2% x (C x D)]
= [1000/ (1,667 x365/30) x (2% x (27,000 x 365/30))]
Therefore, Janice would need to report a standby charge on her T4 slip of $323.94. This would be a taxable benefit and included in her 2014 income for tax purposes.
Operating cost benefit:
Another taxable benefit you will have to pay on a company car is an operating expense benefit. This is a taxable benefit to the employee if their employer reimburses them for car expenses related to personal use. Theses expenses include:
- Gas and oil
- Maintenance and repair expenses less insurance proceeds
- Licenses and insurance
Operating Expenses do not include:
- Capital Cost Allowance (owned)
- Lease costs
- Parking and Tolls.
There are 2 methods for calculating Operating costs:
- Multiply your personal use kilometers by the CRA standard rate of $0.27/km.
- Only applies if at least 50% of the kilometers driven by the employee were attributed to business use. We can multiply standby charge by 50%. This will be our operating benefit.
If we use our previous example of Janice we can calculate her operating cost benefit if she was reimbursed during the year for personal car expenses. Using both methods we will calculate which one will provide a smaller taxable benefit.
- 1000 km x $0.27 = $270
- $323.94 x 50% = $161.97
Since Janice used the automobile for more than 50% for business use (1000/20000 = 10% personal use) she can elect to calculate her operating cost benefit using method 2. This will result in a lower taxable benefit included in her personal income for tax purposes. Like the standby charge, this will be issued on Janice’s end of year T4 slip.
Automobile Tax Allowance
If you drive your own car and your company offers you an allowance, you will have to include this as income on your personal tax return. Employees who receive an automobile allowance which is not based on a reasonable per kilometer base will have to report this income. The CRA’s reasonable rate for 2014 is $0.54/km for the first 5000 and $0.48/km thereafter.
When providing a company car to employee’s, there are three things you must consider in order to minimize their personal tax owing. When an employee uses a corporate automobile for personal use, a standby charge is included as a taxable benefit on their personal return. Further, if the employer provides you with reimbursements for operating expenses on personal use of the car, this will also be included as a taxable benefit on your personal Income. Lastly, if your employer provides you with an automobile allowance, make sure it is compliant with the CRA’s reasonable rates. If they exceed this amount you will have to include the allowance in your income.
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.