Taxable Benefits And The Company Car

Did you know that if you have a company car, you may have to pay income tax on your personal use of the motor vehicle? Whether you are an employee or a shareholder of a company, the company car may result in two taxable benefits included on your T4 slip this year.

These benefits are broken down into two different types:

• A stand by charge for personal use of the company’s vehicle, and
• An operating cost benefit that applies if your employer paid the operating costs of the vehicle (gas, maintenance etc.)

The standby charge and operating cost benefits are calculated differently.

Standby Charge

The standby charge applies regardless of whether the vehicle supplied is primarily for business use or personal use.  The calculation of the benefit differs slightly depending on whether your employer has purchased or leased the vehicle.

The standby charge is:

Employer Owned Vehicles

By cliff1066 (CC 2.0) via Flickr

2% of the original cost of the vehicle (plus sales taxes) x the number of days the vehicle is made available to you / 30.  This rate is reduced for car sales people to 1.5% of the average dealer costs for vehicles.

Note:  The standby charge is based on the number of 30 day periods in the year and not the number of months.  This can made a difference in the calculation of the charge.

If both you and your employer have contributed to the purchase of an automobile, the standby charge is reduced by the amount of your contribution.

Employer Leased Vehicles

The annual lease costs (including sales taxes) x the number of days the vehicle was made available / 365. Less: Annual damage and liability insurance costs included in the annual lease costs. Multiplied by 2/3

Alternatively you may use a more simple calculation: The monthly lease costs (excluding insurance) x the number of months the vehicle was available to you.

Note: When your vehicle is leased and you were required to make an upfront lump-sum payment, this payment is prorated over the term of the lease for the purposes of calculating the standby charge.

Lease termination charges are considered a lease payment for the purposes of the standby charge.  If your employer agrees, you may have this fee applied retroactively.  Keep in mind that the CRA will charge interest on the additional taxes payable on the retroactive application.  Consult a tax professional to discuss your alternatives.

In the context of the standby charge the term “available” is interpreted to mean that the vehicle was made available to you or a member of your family whether for business or personal use.

Reduction of the Standby Charge

The standby charge may be reduced proportionally if both of the following conditions apply:

• Personal use of the vehicle did not exceed 1,667 kilometres per month (20,004 per year), and
• Business use of the vehicle was more than 50% of the kilometres drive.

If these conditions are met, your standby charge can be reduced to a percentage of total personal kilometres driven divided by 20,004.

Note: The actual proportional formula is:

A/B, where
A = The lesser of total personal kilometres driven or B.
B = Available Days / 30 x 1,667

Tips:

• Keep a log book to record your use of the automobile as well as receipts.  The log must record the total distance driven and the distance driven for work related use.  The log must show:
  • Total number of kilometres driven
  • Total business kilometres for the year
• The log can be an official trip log kept in your car or recorded in your appointment calendar.  Choose what works best for you.
• Consider requesting that your employer require you to return your company car to your employers control for periods when you will not be using it.
• Driving to your place of employment is not considered business use.  However, if you are required to meet with clients or make other business stops between your home and the office then the total travel during the day may be considered business rather than personal use.
• The standby charge applies even when there are periods when you are not using the company car.  For example if you travel out of town on business or take family vacations the standby charge will still apply for those periods unless your employer requires you to return the car and control over its use during these periods.

Operating Cost Benefit

The standby charge is related to the availability of the vehicle while the operating cost benefit relates to the operating expenses paid for your personal use of the vehicle.  There are two options available for the calculation of the operating cost benefit:

• A general rate per kilometre of $0.24 for 2010 ($0.21 if you are a car salesperson) to cover the costs of fuel, oil, maintenance, insurance and licensing.  Interest and capital cost allowance is however not included.  See our Automobile Rates & Limits Table.

• If business use of the vehicle is more than 50% of the kilometres drive, then you can request in writing to your employer that the operating cost benefit can be a flat 1/2 of the standby charge.  The request must be submitted by December 31st.

Any amount of the operating costs you reimburse your employer within 45 days of the calendar year-end can reduce the operating cost benefit.

Tips:

• If the number of personal kilometres is high (but less than 50%) and the cost of the vehicle was low then it may be more beneficial to request to apply the operating benefit as 1/2 the standby charge.
• If you employer pays all or a portion of the operating costs and your personal use of the vehicle is more than 50%, the operating cost benefit per kilometre rate may be higher than the actual operating costs.  For example if you drove 10,000 total kilometres (all personal) and your employer paid your insurance of $1,000, your taxable benefit would be $2,400 in 2008 or $1,271 after tax if you are in the top marginal bracket.  If you reimburse your employer the insurance costs, the per kilometre rate would not apply.

If Your Employer Provides You With an Automobile Allowance

If you use either an employer supplied car or your own personal vehicle and your employer provides a reasonable allowance for operating costs based on the number of kilometres driven, this benefit is tax free.  The maximum amounts deemed reasonable by the Minister of Finance are located in our Automobile Rates & Limits Table.

If the allowance you receive is based on anything other than a per kilometre basis, is considered unreasonable and is to be included as a taxable benefit.

Tip:  If the amount of allowance you receive is unreasonably low you may choose to include the allowance in your employment income and deduct actual business related automobile expenses.

Other Resources

• Automobile Rates & Limits Table
• If You Use Your Own Vehicle For Employment
• CRA - IT-63R5 – Benefits, Including Standby Charge for an Automobile, from the Personal Use of a Motor Vehicle Supplied by an Employer – After 1992

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• What Are Automobile Benefits?
• Taxable Employment Benefits
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• Are Taxable Benefits Really A Benefit?