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Fall 1999 

Introduction to Leasing
Buying vs Leasing
Taxable Benefits
Real Life Example
Common Lease Terms

Taxable Benefits and Company Cars

IF YOU ARE A SHAREHOLDER OF A corporation and you desire to purchase (or lease) a new vehicle for business purposes, the question often arises whether you should buy the automobile in the company’s name or whether you should purchase the vehicle personally and charge the company for its usage. This article will discuss the issue involved in making this important business decision.

Company’s Car

Revenue Canada considers the use of company cars by shareholders and employees of the company as a taxable benefit that must be included in the personal income of the shareholder/employee. The calculation of the taxable benefit is composed of two components. The first component is the "standby charge". This charge is determined by reference to each thirty day period for which the vehicle was available to the shareholder/employee, if the automobile is owned by the corporation the standby charge is calculated at the rate of two percent of the original capital cost of the vehicle for each thirty day period that the vehicle is made available to the shareholder/employee, if the vehicle is leased by the corporation, the applicable standby charge is calculated as two thirds of the lease cost (net of insurance) for each thirty day period. Since the standby charge is calculated at a fixed percentage of the original capital cost of the automobile, the amount remains constant from year to year and does not recognize any decrease in value of the vehicle over time. In certain instances, the standby charge is reduced if the automobile is being used at least ninety percent of the time for business purposes and less than 12,000 km per year for personal use. In this case the standby charge would be calculated as follows:

If you own the automobile...

Total personal use in km X (2%/month of original cost of auto) 1000 x (# of 30 days periods)

If you lease the automobile...

Total personal use in km X (.667 x lease payments net of insurance) 1000 x (# of 30 day periods)

The second component of the taxable benefit covers the personal use portion of any operating costs of the vehicle that have been borne by the corporation. Although the corporation writes off these expenses in their calculation of net income for the year, these expenditures must be added to the T4 of the shareholder/employee.

There are three ways in which the amount of the operating costs can be calculated. One way is to have the shareholder/employee maintain a record of his driving to ascertain the ratio of business to personal kilometers he is putting on the automobile. At the end of the year he can easily determine the percentage of business usage of the vehicle and apply that percentage to the total amount of operating costs paid by the corporation on his automobile. The resulting amount is then added to his T4 as a taxable benefit.

Another way of determining the taxable benefit of the operating costs of the vehicle is to assume that these costs equal fifty percent of the standby charge determined above. This option is permitted by Revenue Canada if the shareholder/employee uses his vehicle at least fifty percent of the time for business purposes, records his wishes in writing and so instructs his employer to make this calculation.

A third option that can be used to calculate the taxable benefit of the operating costs of the vehicle is to take the personal usage of the automobile and multiply that figure by fourteen cents/kilometer traveled. Should you choose this method you become liable for the GST on the amount of the benefit. This is calculated as $.O06/kilometer traveled. From the point of view of the corporation, three additional factors to note are:

  1. the maximum capital cost of the vehicle that can be set up on the books for income tax purposes is $29,900 (GST and PST included) per automobile;
  2. the amount of interest that can be deducted by the company on money borrowed to purchase a vehicle is $3,040 per year; and
  3. the maximum lease payments that may be deducted by the corporation in regard to automobile leases is : determined by a complex formula that typically limits these expenses to $650 per month before GST and PST.

Shareholder/employee’s Car

The second option for the shareholder/employee is to consider the possibility of owning the automobile personally and charging’’ the corporation for the business usage he puts on the vehicle. Any amounts received in this regard from the corporation are not taxable. They are simply a reimbursement of expenses previously laid out by the shareholder/employee.

The manner in which the charge is calculated is typically on a per kilometer basis, and should take into account all operating costs of the vehicle as well as its depreciation. Revenue Canada only stipulates that the amount of this charge should be "reasonable" in the circumstances.

Once again, it is imperative that the shareholder/employee maintain adequate records to substantiate his charge to the corporation.

The following simple example illustrates the determination of the taxable benefits in this area where the vehicle was being driven throughout the year.

  • Original capital cost of automobile: $20,870 + 1,670 PST + 1,460 GST = $24,000
  • Lease costs: $606.00 + GST 42.52 + PST 48.48 = $697/month; $8,364/year
  • Operating costs: Gasoline and oil $1,500; Insurance $1,000; Repairs and Maintenance 2,000; Licence $100; Total: $4,600 (PST included, net of GST)
  • Business portion: 75%

Taxable Benefit

Co. Owned Auto Co. Leased Auto

Standby charge

2% x ($20,870 + 1,670) x 12 $5,410
2/3 x ($606 + $48.48) x 12 $5,238

Operating costs (based on usage)

$4,600 x 25% 1,150 1,150
6,560 6,388

Goods and Services Tax

$20,870 x 7% x 2% x 12 351
($1,500 + $2,000) x 100/108 x 7% x 25% 56
213 x ($606 x 7%) x 12 340
($1,500 + $2,000) x 100/108 x 7% x 25% _____ 56 

Total taxable benefit

$6,4961 $6,284

Personal Tax Cost@ 45%

$3,135 $3,053

Fall 1999 : Leasing vs Ownership of Business Assets | Introduction to Leasing | Buying vs Leasing | Taxable Benefits | Real Life Example  | Common Lease Terms

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