If you’re a business operator, does it make more sense to own a car yourself, or have the company own it?
What it is
The car you use for business purposes.
Why you need it
To get to and from business-related outings.
How it helps
If you own the car, the company reimburses you for its use at a rate prescribed by CRA. If the company owns the car, it pays all expenses and deducts them for tax purposes. But any personal use of the vehicle is a taxable benefit.
Good to know
The most cost-effective way to own the vehicle depends on variables such as its value, the percentage of business use and operating costs. Calculations are complex, so have an accountant crunch the numbers. Dean Paley, an accountant and financial planner in Burlington, Ont., says it usually makes more sense for the company to own the car when business use is at least 60%.
When you drive a company-owned car for personal use, there are two taxable benefits:
- The standby charge: This is based on 2% of the original cost of the vehicle, plus sales tax, with another calculation for the length of time the vehicle is available to you. So a vehicle costing $30,000, available to an employee 12 months a year, would be calculated like this: 2% x 12 x $30,000. The sum, $7,200, is the taxable benefit. For leased cars, the standby charge is calculated as two-thirds of the annual lease costs, including sales tax. So for a leased car with monthly payments of $650, available all year, the calculation would be: 2/3 x $650 x 12, for a total of $5,200. To reduce the standby charge, keep personal use of the vehicle below half the kilometres driven.
- Operating cost benefit: This is based on a per-kilometre rate if the company pays for gas, maintenance and insurance. There are two ways to calculate this (both examples assume the employer pays all operating costs). The first is per kilometre, which is allowed only when personal use is under 50%. The charge for 2013 was $0.26/km. If business use is more than 50%, then the second method allows the employee to either take the default per kilometre charge, or half the standby charge.
Who can help
- CRA’s website has a section on motor vehicle benefits
- PricewaterhouseCoopers has produced a tax guide on car expenses in Canada
Say the employee has a company car where 15,000 of the 25,000 kilometres driven are personal (60%). The car’s cost was $30,000. The car was available the entire year and the employer paid all operating costs. The standby charge is $7,200. The charge is then reduced by a formula: the total personal kilometres driven divided by 20,004. So in this case, the reduction is 15,000/20,004 = 75%. The actual standby charge benefit is, therefore, $5,400.
Meanwhile, the operating cost benefit is either 15,000 x 0.26 or half of $5,400. Since business use was 25%, the charge is 15,000 x 0.26 = $3,900.
If the employee reimburses the employer all or part of the $3,900 by Valentine’s Day (45 days from the end of the calendar year), the operating cost benefit is reduced by the amount of reimbursement.
With so many variables, Paley says the differences between personal and company ownership can range from hundreds to thousands of dollars per year.
Stuart Foxman is a Toronto-based financial writer.