Taxable Benefits And The Company Car

by Tax Guy - Burlington Accountant on December 17, 2010 Print This Post Print This Post

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

1950's car 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

Looking For Professional Help?

If you’re looking for advice or tax planning services, you can contact me directly through my professional tax practice.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 54 comments }

Ireni M May 5, 2010 at 2:26 pm

If I drove 2 vehicles in one TB year and the first vehicle was $500 month lease was available till end April the was sold at a loss of $4000 and the second vehicle was at $600 and I drove less than 50% personal on the first vehicle but more than 50% personal on the second vehicle should my employee combine the total cost and mileage and perform one calculation or should they perform a separate calculation for each vehicle. What if the terminal charge was a gain and not a loss?

I would appreciate an answer. Thank you

Tax Guy May 6, 2010 at 9:12 pm

Hello Irene:
I’m a little confused about your question. You have written that you drove the car, but you mention your employee is doing the calculations: Did this employee drive the car as well or are they employed to determine the expenses? Who owns the cars? What is the relationship to the business (are you the sole proprietor or a shareholder/director)?

The article related to expenses of an employee.

Roger December 17, 2010 at 11:35 am

My former employer of 20 years, laid me off in March of 2010. I received 50% of my severance pay that month and will receive 50% in January 2011.

I had company cars, used primarily for personal use for the 20 years of employment. As part of our agreement, my use of a company car was extended to December 2010.

As I am not a shareholder of the company and technically not an employee of the company, can the car really be considered a taxable benefit for the March – December 2010 period?

Tax Guy December 17, 2010 at 12:05 pm

If your not an employee or shareholder, why do you have a car?

Roger December 19, 2010 at 11:07 am

The extended use of a company car after my departure, was part of the settlement.

Tax Guy December 19, 2010 at 6:46 pm

The car is a taxable employment benefit because it was received because of employment.

Nashila January 12, 2011 at 5:26 pm

Could you please tell me if Automobile expense benefits for the owner of a company are subject to personal income tax ? if so, at what point ? I am calculating benefits as 0.52cents for first 5000 Kms and o.46cents for rest of Kms. Thanks for your response.
Sincerely
Nashila

Tax Guy January 13, 2011 at 11:00 am

If you use your own car and the company is reimbursing for mileage used in the course of business, then there would be no taxable benefit provided it is below the maximum allowable amount.

I hope this helps.

Nashila January 14, 2011 at 3:02 pm

Well, what is this maximum allowable amount for 2010 beyond which tax kicks in? Thanks

Tax Guy January 14, 2011 at 9:34 pm

If you are referring to the mileage rates, there is the link to the current rates.

For 2010 it was $0.52 per KM for the first 5,000 km and $0.46 after that.

adam January 18, 2011 at 10:46 pm

“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.” Would fuelling the vehicle for the days business use be considered a “business” stop?

Tax Guy January 19, 2011 at 8:51 am

If you are only stopping to get fuel on your way to the office then it would not qualify.

Floyd Atkinson February 3, 2011 at 5:31 pm

If you pay a taxable benefit on a company vechicle can you supply a ride for other employees in the company without them paying a taxable benefit also on the same truck?

Tax Guy February 4, 2011 at 10:07 am

If you have a taxable automobile benefit included in your income and you provide a ride to other employees, the benefit is not included in their income.

John February 13, 2011 at 12:36 pm

If company pays allowance and per km milage rate, what is the minimum amount company should pay? What is the CRA standard rate which company should pay to they employee.

Tax Guy February 14, 2011 at 10:35 am

An allowance is fully taxable. The minimum mileage rate is http://www.fin.gc.ca/n10/10-134-eng.asp

Jane February 17, 2011 at 12:42 pm

A senior executive was provided with the use of a company car. Is this taxable benefit to be listed on the T4? I am familiar with car allowances where we also issue T2200.

Tax Guy February 17, 2011 at 4:23 pm

Jane,
Yes the car is tax taxable benefit which may be reduced under certain conditions.

C Nutt February 22, 2011 at 3:12 pm

Company provides employee a car – no problem with the standby charge calcs.

Company pays for insurance on car but all other costs are paid for by the employee directly. Operating cost benefit calc doesn’t make sense to use – so is taxable benefit for insurance paid by the company just based on pro-rata personal usage?

Tax Guy February 22, 2011 at 5:08 pm

If the employer is paying some of the operating costs, there will be an operating cost benefit. If the car is used mainly for business, you have the choice of 1/2 the standby charge or the actual costs paid in proportion to your personal use of the vehicle.

Jerry February 23, 2011 at 12:54 pm

I drive a vehicle provided to me as an employee of the Govt of Ontario. There is much discussion on the standby charge for personal use of these vehicles. We are prohibited from using the vehicles for anything other than government business, ie, no personal use on evenings and weekends, but do record kms as personal for trips directly from a residence to usual place of business.

Should the days through the year that are not available for personal use as described be deducted when calculating standby charges?

Thank you

Tax Guy February 23, 2011 at 1:13 pm

Driving to and from work is personal use of the vehicle and would affect your taxable benefit.

If you don’t want a taxable benefit, you would need to leave the vehicle at the employers parking lot every day.

Bubble March 3, 2011 at 3:40 pm

This is a hypothetical scenario: I might have to do business travel with my personal vehicle. I have an allowance of 0,25 cents/km. Would I be able to file for the remaining rate per kilometers that are set by federal government? In the case that the allowance was set as part of my taxable income (Put that the scenario would be around 12000 km or more (even double). The forms mentioned that this is possible if the allowance is reasonably low or high, up to what % does the agency considers reasonable; and having my employer filling the pertinent form.

Tax Guy March 3, 2011 at 4:23 pm

The $0.25/km would be tax free. If you don’t think it’s enough add it to your income and claim the actual expenses related to business use.

Amy March 10, 2011 at 2:15 pm

Hello,
As the principal shareholder of my corporation, what is it more beneficial to the company, and to myself personally: have the company pay the lease for my vehicle or have the company pay me a car allowance?
Thank you in advance for any insight you may have.

Joanna March 15, 2011 at 9:59 am

The article answers your question.

Tax Guy March 15, 2011 at 10:09 am

That article answers your question.

sheldon February 21, 2012 at 5:32 pm

i have a company truck i use i for picking up workers in the morning and droping them off for out of town work i go from home to the job sit to save wasted trips to the office what is concidered personal use for me

Tax Guy February 22, 2012 at 6:28 am

Possibly the trips home to wait would be personal. But you should discuss it with your employer.

Kris March 1, 2012 at 5:59 pm

Does a company benefit by providing an employee with a company car? Ie.in a scenerio where a dealership offers the use of a vehicle to a sales person and then later sells that vehicle at a loss, what incentive is there for that dealership to offer a vehicle?

Tax Guy March 2, 2012 at 2:22 pm

I doubt the dealer would loose money. They normally do not give much of a discount on “demo’s.”

Kris March 2, 2012 at 2:30 pm

Would they be able to claim an amount back as a credit on their taxes?

Tax Guy March 2, 2012 at 2:42 pm

What wold they claim? The dealer is getting less back when the sell the car.

Shawn March 12, 2012 at 1:20 am

If a vehicle is owned by Company A for exclusive use by a shareholder and that shareholder uses the car for business travel for an unrelated Company B, can Company A bill Company B for usage, so that it does not impact the personal use km?

Tax Guy March 12, 2012 at 5:39 pm

Company A can bill for use. Personal use is not affected.

JPFOUT March 14, 2012 at 2:55 pm

My company has moved me to a new role where I no longer need a vehicle. In light of this they allow me to drive the car for 6 months of transition then offer the car to me at 50% of the black book value to purchase. In talking to some other employees they have inidicated that I will have to pay 40% tax on the purchase price of the vehicle as it is considered a taxable benefit. Is this true? I live in Alberta if you need this for reference.

Tax Guy March 15, 2012 at 8:30 am

JPFOUT,
There will be some tax consequences here because you are being allowed to use a company supplied car for personal use for the 6 month period. This is a taxable benefit to you. In addition, the offer to sell you the car at 50% of black book value is also a benefit since you are able to buy a car at half of its value, your employer is giving you a deal.

The operating cost and standby charge benefit as well as the other benefit if you purchase the car would be added to your income for tax purposes and you pay income tax at your marginal rate. So it could very well be 40%.

Now remember, you are getting to use a car and buy a car for half of its cost. If you buy the car and will have trouble with the tax bill, you can go to your bank and explain that you are buying your employers car and will have a tax bill. Take out a loan to pay the tax bill but really the loan is just a car loan.

Zahid Iqbal July 9, 2012 at 12:57 pm

What is the maximum amount of car allowance which can be provided to any employee. Car allowance is not based on kilometer driven instead we only want to provide a straight amount every month.

Thank you,

Zahid

Tax Guy July 10, 2012 at 8:30 am

If you pay a flat fee, the allowance must be included in income on the T4 and the employee claims automobile expenses.

Zahid Iqbal July 10, 2012 at 9:12 am

But is there any limit on the amount we can provide to our employees?

Thank you

Tax Guy July 10, 2012 at 1:14 pm

There is no limit. The only requirement is that the flat payment is included as T4 income for the employee.

Zahid Iqbal July 10, 2012 at 1:37 pm

Many thanks for your help

Mark August 21, 2012 at 8:25 pm

My company is deciding whether to give me a car allowance or provide a small car to me. We are having trouble figuring out which scenario would be better. The primary use of the vehicle would be business with a minor amount (25% of km) being used for personal. Can you receive a car allowance flat rate for the use of the car to and from work, and collect a km usage (non-taxable) for business use? That way the car is not being used for the same purpose?

Burlington Accountant August 22, 2012 at 9:07 am

The only car allowance that is allowed tax-free is the per KM rates which have maximums set by the government. For 2012 the maximum allowance is $0.52 for the first 5,000 km and $0.46 thereafter.

Assuming you have 25,000 km and use 25% for personal, the maximum tax-free allowance would be $8925 per year. That’s more than $740 per month!

If they provide you with a car, then you have a taxable employment benefit based on the cost and any amounts paid.

If you’d like me to run a scenario and help you decide, please contact me at my office. I’ll evaluate both options and run through them with you.

Tara August 24, 2012 at 3:53 pm

In calculating stand-by charges, why is it calculated on 2% of the acquisition cost and not on the depreciation cost? Are you aware of any exceptions to this rule?
And further, are stand-by charges reduced for employees who are considered on call for emergency service work 24 hours a day?

Burlington Accountant August 24, 2012 at 5:28 pm

I honestly don’t know where the 2% comes into play. The basic standby charge is 2% per 30 day period or roughly 24% per year. Possibly it assumes that the average car is held four years.

The standby charge is reduced by the amount of any business kilometers used in the year. So the time does not matter but rather if it’s used for personal use.

Holly smith September 7, 2012 at 5:36 pm

Hi there, i was wondering if you would be able to help me determine which scenarios would work better for me also? I am possibly joining a company which would be providing me a company vehicle. He said that it would not be a taxable benefit as long as the personal usage was under 10 percent of total KM. I just don’t want a big tax bill unexpected at the end of the year!!! Help! Thanks in advance, Holly

Burlington Accountant September 10, 2012 at 9:07 am

Hi Holly,

There is a taxable benefit for having the car available for personal use (standby charge) and an operating cost benefit if the employer pays the operating costs. There is no 10% rule, but the standby charge and operating costs benefits can be reduced if your personal use as compared to the business use is low.

To avoid a year-end tax hit, your employer may include the benefit in your regular paycheque. If not, you can save the additional tax you may owe or request additional tax be deducted at source.

If you would like me to help you determine the best option, give me a call or contact me directly.

Jennifer October 23, 2012 at 3:12 pm

As an employer, my employee pays the company $300 per month to offset his personal use of our company vehicle. How should I reflect this on his T4? Is there a tax implication for the employee?

Emily November 8, 2012 at 1:56 am

Hi there. I have driven a company car for 12 years. I am just coming off one year maternity leave, and was layed off effective with my return to work. (They are allowing me to keep my company car for an additional 8 weeks). Throughout my 12 years in the company, they have never deducted pay (from paycheques) for personal mileage. It has always been an identified dollar amount on my T4 slip, that I get taxed on. Now, they are trying to deduct a very large amount (several thousand dollars) off my lump sum severance pay in addition to income tax. They explain this as personal use of company car while on maternity leave. (TB Car). To my knowledge, being layed off, maternity leave or not, they never deduct pay for personal use of company car, it has always been an identified amount on my T4, part of my income, that is taxed. It is not a dollar amount that I have to pay, it is a taxable benefit (the personal mileage, correct?) Please help. This is thousands of dollars they are trying to deduct. I have discussed with my employer, and they are looking into it. I told them I would be getting a lawyer if they deduct this amount. Please advise. Thanks in advance!

Tax Guy - Burlington Accountant November 8, 2012 at 10:30 am

The ITA requires that when an employer provides an employee with a company car that the employee be effectively allocated the personal/non-business use of the company vehicle as a taxable benefit.

As you mentioned, they have previously included the taxable benefit on your T4 but now that you have been released from employment, they are now deducting the tax cost for the current year from your final pay and severance.

Logically you are going to pay tax on the benefit of your personal use of the car whether they take the deduction or not and the deduction is payment of your tax on this benefit. From my perspective, I’m not sure you would get very far because if there is an over deduction of tax, you will get that amount back when you file in the new year.

Another contributing factor in the amount of tax deducted is the payment of severance itself. The payment of a large lump-sum payment does normally cause the tax deducted to increase dramatically. This is a function of how the CRA requires the deductions to be made. Again, if too much tax is taken off, you will get it back when you file in the new year.

I would caution you in hiring a lawyer to fight the amount of tax deducted. Assuming the employer over deducted, you’d be paying a lawyer to recover funds you’d get back anyway. To compound matters, the lawyer’s fees would not be deductible!

If you are disputing the amount of gross (pre-tax) severance and other compensation, then hiring a layer may make sense and their fees would be deductible.

I hope this helps.

Zahid Iqbal November 8, 2012 at 10:45 am

I am independant contractor working for a public organization. I just leased a car. What kind of car expenses I can claim considering that I have a permanent place of work.

Many thanks

Tax Guy - Burlington Accountant November 8, 2012 at 10:53 am

If you’re an independent contractor, you may be considered self-employed. The leasing costs (within limits) and all operating costs for the use of the car for business purposes are deductible.

You will need to retain all receipts for fuel, maintenance, parking, licensing, tolls etc. as well as track the mileage used for business and total mileage. The best way to track your mileage is to use a mileage log such as this one, or to note your mileage on January 1st and December 31st and then write down the mileage used for business in a day timer or other calendar.

Tax Guy - Burlington Accountant October 24, 2012 at 9:21 am

The amount is reflected in the calcualtion of the amount reported in boc 34 of the T4. At a high level, the reimbursement reduces the operating cost benefit and/or standyby charge.

If you would like, I can have the T4’s prepared for you. It’s simply a matter of contacting my office in January and we can begin the process2

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