Table of Contents
Article Key Takeaways
- Corporation automobiles are often used for different purposes, varying on the income and taxable benefits between personal use or business use
- Taxable benefits are found on T4 slips and deducted from payroll
- Charges and costs depend on the employer’s method of financing the automobile
- The mileage use influences on the benefits applied onto the vehicle’s purpose of use
You have decided to buy a car – you want the newest model, or your current vehicle broke down, or you want to try another brand. Whatever the case is, you decided to head to a dealership to sign a new lease agreement.
However, heading to a dealership to buy or lease an automobile does not have to be only for personal use, but for business use as well. Many companies need a vehicle for employees to run errands, make deliveries, travel or attend meetings and conferences.
If someone uses a vehicle for both business and personal use, some of the expenses are, naturally, cannot be included in the company’s book for tax purposes.
Examples of when a car is used for personal reasons:
- Using a vehicle on the commuting from home to work
- Using the vehicle from work to a restaurant on a Friday evening
- Running an errand to the grocery store
Examples of when a car is used for business:
- Commute from work to a conference center
- Drive to another office location
- Drive to meet with a client
Are There Taxable Benefits for Automobiles Used by Employees?
When a car is leased, there is a benefit deduction on the business side of car usage. According to the Canada Revenue Agency (CRA), an employee using a company’s car for personal reasons may actually pose a taxable benefit – even if the “personal use” is commuting from home to work.
This benefit can be found at an employee’s T4 slip, and deducted from payroll or Employment Insurance (EI), and it is composed of two elements: the standby charge benefit and the operating cost benefit.
In short, standby charge is a benefit in your income for the fact that an employer-provided automobile is available for an employee to use, whether they actually used it or not. It is important to note that standby charges only apply where the employer provides an employee with an automobile – hence why the word “standby” is applied to the vehicle at residence. If someone used their own automobile for employment purposes, there is no standby charge or operating benefit. Instead, the employee may be eligible to claim a mileage.
The standby charge calculation may vary depending on whether the employer leases, finances or owns the automobile. The charge is then calculated as 2 percent of the monthly vehicle’s cost (monthly premium) or ⅔ of lease cost of the automobile (when owned).
In addition to the standby charge, an employee must also consider the Operating Cost benefit. Put simply, the operating cost benefit is virtually composed of all expenses associated with an employer provided automobile incurred for personal use. This includes gas, oil, tires, repairs and maintenance.
This benefit can be calculated at CRA’s prescribed rate (0.29/km in 2022) to the number of personal kilometers driven in a year. Alternatively, if the employer provided automobile is used primarily for personal use (50% > personal kilometers), then the operating benefit may be calculated as 50% of the standby charge.
How CRA Calculates these Automobile Benefits
The Canada Revenue Agency has a calculator in hand, available on their website. You can take a look at it here.
But what do you need to provide when calculating such benefits? It is very simple – here is a list:
- Lease costs of the vehicle
- For how long the employee had the vehicle available for their use
- The mileage of the vehicle for business and personal uses
- How much the employee reimbursed the employer for the use of the vehicle
CRA calculates taxable benefits by adding together the standby charges and operating costs of an automobile. These numbers are based on the cost of the vehicle, the availability of the vehicle, the total use of kilometers and the total use of personal kilometers.
In short, an employee that uses a company’s vehicle for personal use will have to report a greater income amount of vehicle benefits money in their T4 or T4A slips. Naturally, an employee or an employer that uses an automobile for less time, will report less taxable money on their slips.
Therefore, when an employee’s use of an automobile for personal use is greater than 50%, the taxable benefit will also be greater, in comparison to a personal use that is less than 50%.
Tax Deductions for Corporation Vehicles
In 2022, the maximum ceiling on passenger vehicles acquired after January 1st increased from $30,000 to $34,000. This means, for tax purposes, that a corporation may only depreciate a passenger vehicle to a maximum of $34,000 over the vehicle’s lifetime.
Further corporations may also deduct a maxim of $900 per month, before taxes, on passenger vehicles leased by a corporation. There is no limit to parking and operating expenses (i.e., registration, repairs and maintenance, insurance, gas) incurred for income earning purposes.
In order for these costs to be deducted, however, they have to be documented well through logbooks and receipts.
Documenting Expenses on a Corporation’s Vehicle
The importance of keeping track of a vehicle’s expenses are strictly reserved for a company’s use and for taxes, since the Canada Revenue Agency has very particular rules on the information required in regards to tax benefits and deductions of a corporation’s vehicle.
CRA looks for the type of vehicle, the number of seats, the percentage of use and time, the kilometers driven – and so on. A logbook must contain the dates for each trip taken with the vehicle, the purpose of such trip, the final destination and the number of kilometers, of course.
The way a corporation chooses to keep track of this information is a personal choice – either a physical book with handwritten notes, or an Excel workbook or even apps can be used, such as TripLog, Quickbooks Online or MileIQ.
- Is it better for a business to lease or buy an automobile in Canada?
Leasing a car provides lower monthly payments, and the automobile can be returned once the lease is up every few years. Buying is a good option for those who would like to have a vehicle under their name with no conditions, and no monthly payments in the long run.
- Are there tax benefits in Canada for business owners to buy an automobile?
When buying an automobile, business owners in Canada keep the ownership of the vehicle under the company’s name, and tax deductions vary according to the payment method. When leasing, the vehicle stays under the owner’s name and has to be returned in good shape after the lease term ends.
- What are the non-taxable costs for businesses leasing a car?
Aside from making sure that the vehicle is in good condition, there are also charges on vehicles that exceed the lease’s usage of kilometers. The interest rate on the lease is another factor to consider.
- What factors should a business owner in Canada consider when buying or leasing an automobile?
The decision depends on how often the vehicle will be used, for how long a business plans to keep the vehicle, how many kilometers would normally be used, and what tax deductions the business owner is comfortable with.
This publication is produced by FShad CPA Professional Corporation as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.