Company Vehicles – What’s The Right Strategy?

Automobiles – An Accountant’s Viewpoint – Part 8

Company vehicles – what’s the right strategy?

One of the perks many business owners often feel entitled to receive is the use of a company vehicle.  This is a notion that can carry some very hefty, unexpected tax consequences, which I will explain in this month’s article.

If the company-owned vehicle is used substantially for business purposes (which typically means greater than 90%), then you will likely be allowed a taxable benefit if you are the primary operator of that vehicle.  However, if the vehicle use includes travelling to and from work and personal use in addition to business purposes, then you will most likely not meet that 90% threshold.  Mileage to and from work is not considered business by Canada Revenue Agency.

The consequence of not meeting the 90% business-use threshold is that the principal operator of that vehicle will have to include two taxable benefits on their T4 in that given year, as follows:

  • Operating benefit calculated at .25 cents per kilometer driven for non-business use (.22 cents if you are in the business of selling or leasing vehicles). This could be reduced if the vehicle is used greater than 50% for business purposes.
  • Standby charge is a calculation that is based on 2% of the cost of the vehicle per month multiplied by the number of months the vehicle is available for use. Leased vehicles are calculated based on 2/3 of the lease payment multiplied by the number of months the vehicle is available for use. This can be reduced by the amount the vehicle is actually used for business.

Other considerations

Most passenger vehicles that are owned by a company are restricted for capital cost deduction purposes and denied a portion of GST input tax credits (ITCs).  The ceiling for capital cost is $30,000 plus applicable taxes for most passenger vehicles. The company may have purchased a $60,000 vehicle, however, the maximum tax cost you can use for tax purposes is $30,000.  There are some exceptions to this limit, dependent on the type of vehicle, use of vehicle, and the percentage it’s used for business purposes.

Interest is capped at $300 per month.  Lease payment deductions are capped at $800 plus PST and GST per month.

It is highly recommended that an accurate mileage log be kept to support the business use of the vehicle.

An alternative that is not a taxable benefit

Perhaps the safest route to follow when your business use of the vehicle is a fairly low percentage is to own the vehicle in your own name and either:

  • Obtain mileage reimbursement, which is .54 cents per kilometer for the first 5,000 kilometers, and .48 cents for each additional kilometer after that. This is intended to reflect the main costs of owning and operating an automobile, such as depreciation, financing, insurance, fuel, and repairs & maintenance.
  • Deduct the business use portion of the operating expenses of the vehicle on your personal tax return as a percentage of the business use of the vehicle (again keep a mileage log).

This article is just a brief overview of automobile tax rules.  The issue is complex and the tax consequences significant.  It is always best to discuss such automobile rules with your accountant, or reach out to me to discuss which strategy is right for you.

Article provided by:

Jonathon (Tug) McGraw, BCOMM, CPA, CA

BDO Canada LLP

Jonathan can be reached at: jmcgraw@bdo.ca

 

 

It\'s only fair to share...Share on FacebookShare on Google+Tweet about this on TwitterPin on PinterestShare on LinkedInEmail this to someonePrint this page

Leave a Reply

Your email address will not be published. Required fields are marked *