Driving a company car can be a great perk. But, there are costs and taxes to consider.
Salaried and commission employees and company owners who drive a company provided car are subject to a taxable benefit for their personal use of the vehicle. This is the only tax amount that individuals need to pay.
If you're driving your car for business purposes, no specific taxes or licences apply. But, you can claim several tax-deductible expenses.
If you drive a company provided vehicle, you only pay tax on the taxable benefit. A calculation of two components determine the taxable automobile benefit calculation:
The CRA‚Äôs taxable benefit information describes these components in detail. Based on the example provided, a $25,000 company car with 15,000 kilometres of personal mileage during the year would add $8,550 to your gross income! If your marginal tax rate is 30 percent, you'll pay $2,565 of income tax for having access to the company car.
That might sound like a lot but remember the perks: you'll be driving a newer vehicle all year and you won't have to pay any insurance or maintenance costs. You can run simulations using CRA's company car tax calculator for employers.
The costs of owning, leasing and using a car are considered allowable tax-deductible expenses when the car is used for business purposes and to earn income. An individual who uses their private car to earn income can deduct certain expenses:
In December 2017, the Government announced taxable benefit and deduction limits for the 2018 tax year. You can claim the deductions in 2019 when you file your 2018 tax return. Expect an announcement for the 2019 tax year before the end of this year.
Whether you're a salaried or commission employee, self-employed, or the owner of a company, you can deduct the reasonable business (i.e. non-personal) portion of expenses related to using your personal vehicle to earn income. More details about allowable car expenses and definitions are available on the CRA's website.
Tax-deductible car expenses for vehicles used to earn income include:
Calculating your mileage deduction is easy. Only, make sure to keep all your receipts and maintain a detailed log of business trip mileage.
You'll need to calculate your percentage of business mileage versus total mileage for the year. You'll also need your car's total mileage on the first and last day of the year. These are key variables, so they need to be accurate!
Fortunately, you can track mileage with an app like MileIQ, or use a log book and record each trip in detail. MileIQ is a handy app that tracks mileage and business trips for you on your phone.
If more than 50 percent of the car's mileage during the year is personal, it's usually more cost-effective to use a personal vehicle. This is especially true for more expensive cars due to the standby charge.
The standby charge is a cost the employee bears for having a company car "on standby" for personal use. According to Tim Cestnick, a personal finance columnist at the Globe and Mail, "Using a car owned or leased by your employer begins to make sense if you're driving the vehicle mostly for business purposes (say, over 70 percent of the time)."
See the CRA's standby charge information to find out more.
If your personal use of a company car is quite modest, make sure you're tracking your mileage accurately. Low personal mileage can attract scrutiny because it reduces the standby charge and the tax you have to pay.
If you use your car to earn income, you can claim the full CCA on a vehicle you purchased that costs up to $30,000 plus taxes. If the value exceeds $30,000, you won't get to deduct the excess cost. Tax-wise, it's best to buy a car that costs less than $30,000.
If your employer provides your vehicle, the additional income tax you pay will be based partly on the price of the car. If you have a choice, the cheaper vehicle would be better for tax purposes. It could save you a thousand dollars or more in income tax, depending on your personal and business mileage.
If the car is leased, there are tax and cost considerations. Let's see how leasing scores against purchasing in this comparison:
Final score: Lease 5 - Buy 2
Leasing is the winner in this example, but the decision to lease or buy depends on a few factors. Consider whether you want to own a depreciating asset, deal with maintenance issues in the future and how much mileage you expect.
If your business takes you on the road most of the time and your mileage is 30,000 km or more, purchasing may be the only available. Alternatively, you could purchase a two or three-year-old car instead of leasing. Then your purchase or financing costs would be much lower than for a new car.