Certain situations involving automobiles may trigger certain tax consequences and planning considerations as follows:
- Employer-owned vehicles used by employees for business and personal reasons
- Allowances and reimbursements for automobile costs incurred by employees
- Deductible expenses by the employer
Although automobile benefits are included in income from employment for the employee in certain cases, there is a lack of reciprocity in terms of how such amounts are calculated on the employee side as a taxable benefit versus the deductibility and actual cost incurred by the employer.
There are two types of taxable benefits that are generally assessed for employer-owned vehicles used by an employee for business and personal reasons:
- A standby charge benefit is meant to reflect the fixed cost of owning a vehicle, although the calculation is performed using a specific formula; and
- An operating cost benefit is meant to reflect the costs of operating a vehicle, although the calculation is performed using a prescribed fixed rate for each kilometer used for personal purposes.
A reduced benefit calculation applies in cases where the automobile is primarily (more than 50%) used for employment purposes and the employee is required to use the vehicle to perform their employment-related duties.
A different calculation is performed to calculate a taxable benefit for leased vehicles, which typically results in a lower taxable benefit when compared to an employer-owned vehicle, although not always.
Assume, for example, that Joey, the owner of his construction company, purchased a Toyota passenger vehicle in the company’s name for $50,000 including HST. Joey uses the vehicle for both business and personal reasons. He travels for work on an average of 8,000 kilometers per year out of a total of 20,000 yearly kilometers. He is not entitled to a reduced taxable benefit calculation. The standby charge benefit is $12,000 and the operating benefit is $3,480 for a total taxable benefit of $15,480. This taxable benefit is added to his regular salary on his T4, and he is, therefore, subject to tax on this additional income at his marginal tax rate on his personal tax return. In some cases, the employee ends up paying more in taxes in a few years than the actual cost of the vehicle and the tax write-offs his employer is entitled to take in respect of the vehicle.
Reimbursements for amounts incurred by an employee during their course of employment are generally not taxable, unless in certain specific situations.
Certain allowances are not taxable benefits to the employee while allowances for personal or living expenses are treated as taxable benefits. Reasonable allowances for vehicle expenses are not taxable. The government-prescribed rate for the automobile allowance for 2022 has been updated to $0.61 per kilometer for the first 5,000 kilometers driven and $0.55 per kilometer driven in excess of 5,000. These allowances provide the employees with compensation for the wear and tear of their vehicles but do not have a direct relationship with the actual costs incurred for the cost and maintenance of such vehicles, as follows:
At Lorena Boda CPA Professional Corporation, we would be happy to assist with your business decisions and reporting requirements.