Use of Company-Owned Vehicles and the Taxation Consideration

Use of Company-Owned Vehicles and the Taxation Considerations—An Accountant’s Viewpoint

Did you receive a large taxable benefit on your T4 last year related to the personal use of a company-owned automobile? That amount may have been very large as a result of two taxable benefits associated with use of a company-owned vehicle. These benefits include:

  • Operating benefit is calculated at 26 cents per kilometre driven for non-business use (23 cents if you are in the business of selling or leasing vehicles). This can be reduced if the vehicle is used more 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 two-thirds 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. Or a simplified method of cost of the vehicle multiplied by 24%.

For example, if the company-owned vehicle was purchased for $50,000 (including taxes), you’re the primary operator of the vehicle and you use the vehicle less than 50% for business, the standby charge is calculated based on the purchase price including all taxes. The taxable standby benefit is $50,000 x 2% x 12 = $12,000.

Let’s assume you accumulated 10,000 personal kilometres on the vehicle; the operating benefit would be $2,600. The combined benefit added to your T4 in 2018 will be $14,600.

You can reduce these taxable benefits

You can reduce these taxable benefits by reimbursing your employer for personal use of the vehicle. For a standby charge reduction, your payment must have been made during 2017. For an operating benefit reduction, you must make the payment by Feb. 14, 2018. Before reimbursing your employer, you will want to consider the net cash out of pocket. If you are at the highest tax bracket you will end up paying $6,900 in taxes using the above example. From a cash flow point of view, this may seem reasonable compared to reimbursing your employer $14,600 in order to avoid the taxable benefit.

This article provides a brief overview of considerations for your yearly tax planning when using a company-owned vehicle. The issue is complex, and the tax consequences notable. It’s always best to discuss such tax-filing considerations with your accountant—or reach out to me at BDO—to discuss which strategy is right for you.

This article has been carefully prepared and the information is correct as of Jan. 23, 2018, but it has been written in general terms and should be seen as broad guidance only. The article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on information in this article or for any decision based on it.

Comment provided by:

Jonathon (Tug) McGraw, BCOMM, CPA, CA

BDO Canada LLP

Jonathan can be reached at: jmcgr

 

 

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