The taxable benefit to an employee for the personal use of a company car is no laughing matter.
Jim Maroney:: For Canadians
If your employer offered to provide you with a company car, would you accept? Of course you say, only a fool would say no. But is the answer to the question really that easy? Certainly not, at least not once the taxable benefit is considered.
If your employer provides you with a company car, you will likely have to include a taxable benefit in your income each year to account for your personal use of the vehicle. You’ll find this taxable benefit in box 34 on your T4 slip. In actual fact, this taxable benefit really consists of two different elements: an operating cost benefit and a standby charge. As always, the underlying calculations can get quite involved so I’ll stick to the most common situation for ease of understanding.
The operating cost portion of the benefit is simply equal to 14 cents per kilometre of personal use. Looking at it from a different angle, every kilometre of personal use creates 14 cents of additional employment income which you will have to pay tax on. Remember that driving between your home and your place of work is normally considered to be personal use.
Some basic calculator work should reveal the size of your operating cost benefit. You’ll also need to know the employer-paid operating costs of your vehicle if there is any chance of reducing the size of your benefit.
Where the operating cost benefit is greater than the actual costs incurred by your employer you will usually be better off to reimburse your employer for such costs. As long as the reimbursement is done by February 14th, you can reduce or eliminate the operating cost portion of your taxable benefit.
The second element of the benefit, commonly referred to as the standby charge, is an amount that must be included in your income just for having the vehicle “available” for your use. In its simplest form, where the employer purchased the vehicle, the standby charge is computed as 2% of the actual cost of the vehicle (including PST and GST) for 30 day period that the vehicle is made available for use by the employee. Notice that the calculation is based on the original cost of the vehicle; there is no adjustment to account for the effect of depreciation as the vehicle ages. Evidently, Revenue Canada believes that vehicles never lose their value no matter how old they get.
For example, assume that your employer purchased a vehicle costing $27,360 ($24,000 before PST and GST) which was available for your use throughout 1997. The standby charge that would be included in your income would be equal to $6,566 (2% x $27,360 x 12 months). In a 50% tax bracket, this benefit would result in an additional income tax liability of $3,283 for each and every full year that the vehicle is available for your use. Now that’s not pocket change.
Before the sheen wears off that new company car, you may want to consider the following ideas to reduce your standby benefit:
1. Where the employer leases the vehicle, the standby charge is equal to 2/3 of the annual lease cost (including PST and GST, of course). In most cases, this will produce a smaller standby charge to the employee. Carrying on with the above example, the monthly lease payment would have to be $821 to produce the same standby charge. Clearly, a $24,000 vehicle can be leased for substantially less than this amount, thereby producing a lower taxable benefit to the employee.
2. If your business use is greater than 90% and your personal kilometres are less than 1,000 per month there is a special adjustment available that serves to reduce the amount of the standby charge. As an employee, you will have to advise your employer of your total business and personal kilometres so that the adjustment can be taken into account when your T4 is prepared. Keeping a log of business and personal use is imperative here.
3. If possible, consider leaving both your car and your keys at your employer’s place of business during vacation time. This can have the effect of reducing the number of 30 day periods during which the vehicle is available for the employee’s personal use. Again using our above example, if the vehicle is left at the employer’s for 3 weeks during the year, the standby charge will be reduced by $547.
4. Because the standby charge is based on the original price of the vehicle it may make sense for the employee to purchase the vehicle from the employer. This will often make sense where the vehicle is at least a few years old. The employee can then have the employer provide a tax-free reimbursement which is based on the per kilometre rates prescribed by Revenue Canada. In 1997 these rates were 35 cents per kilometre for the first 5,000 kilometres and 29 cents thereafter.
The taxable benefit to an employee for the personal use of a company car is no laughing matter. If you’re getting nailed with a large taxable benefit every year you’d be wise to do a bit of number crunching to make sure that you’re getting the best deal possible.
Jim Maroney is a chartered accountant with Andrews, Brown, Maroney in Maple Ridge
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