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.
What tax do I pay on a company car?
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 operating cost taxable benefit per kilometre of personal use
The standby charge based on the purchase price of the car and days of personal use. A reduced standby charge applies when you:
use the car more than 50 percent of the time for business
drive less than 20,004 kilometres per year for personal purposes
The CRA’s 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.
Who can claim car expenses on their taxes?
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:
Salaried employees (including employees on commission) who are on the road as part of their job. According to the CRA, you can deduct allowable car expenses you paid for if you received no tax-free allowance or received an allowance that's included in your income.
Self-employed individuals can also claim these deductions.
What are company car tax rates in 2018-19?
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.
Changes for 2018
If you drive a company provided car, the taxable benefit for the personal portion of the operating cost increases by 1 cent to 26 cents per kilometre. Standby charge calculations have not changed. The employer will deduct income tax on the total taxable benefit.
Tax-exempt allowances paid to employees who use their car for business purposes increased by 1 cent to 55 cents/km for the first 5,000 km, and by 1 cent to 49 cents for mileage above 5,000 km.
Unchanged amounts from 2017
You can claim a capital cost allowance (CCA) on business use of a passenger vehicle costing up to $30,000 (plus sales taxes) that you purchased after 2017. Yearly CCA deductions help offset the declining value of the car you purchased.
You can deduct up to $300 of allowable car loan interest per month for a vehicle you purchased after 2017.
Deductible lease costs are capped at $800 per month (plus sales taxes) for leases that started after 2017. For vehicles that cost more than the CCA ceiling of $30,000, deductible lease costs are prorated.
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:
Maintenance and repairs
Licence and registration fees
Capital cost allowance (to offset depreciation).
Insurance
Eligible interest on a car loan (up to $300 per month)
Eligible leasing costs (up to $800 per month)
Accurate, detailed mileage tracking is key to calculating allowable car expenses
Calculating mileage tracking 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.
Should my company buy or lease the car I drive, or should I?
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)."
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.
Which company car is best for tax?
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.
Is it better to purchase or lease a company car?
If the car is leased, there are tax and cost considerations. Let's see how leasing scores against purchasing in this comparison:
If your company or employer provides your car, you could pay several thousand dollars in extra income tax each year. Since lease costs are typically much lower than loan payments for the same vehicle, your taxable benefit and income tax hit will be less on a leased car. Score: Lease 1 - Buy 0.
Lease and purchase costs are tax-deductible for a company. Leasing is less of a drag on your company's cash flow because the monthly amounts are much lower. If cash is tight, it's better to lease. Score: Lease 2 - Buy 0.
Leasing makes getting a new car every few years easier. New cars offer updated safety and technology features and have few maintenance issues. Score: Lease 3 - Buy 0.
When you lease a car, you don't have to worry about problems down the road. At the end of the term, you return the car to the dealership. If you don't like the vehicle, or if it's a "lemon," you can get rid of the problem at the end of the lease. Score: Lease 4 - Buy 0
In the long term, leasing costs more than buying, since payments never end, and you don't own the vehicle. Once a car loan is paid off, the car is yours and payments stop. Score: Lease 4 - Buy 1
End of lease costs can add up to hundreds or even thousands of dollars for repairs, mileage overage, replacement of worn tires and cosmetic fixes. Score: Lease 4 - Buy 2
For the same monthly amount, leasing gets you a higher-end car, because payments only cover a portion of the price of the car and taxes, typically 50 percent over four years. When you finance a car purchase with a loan, 100 percent of the sales tax is paid up front. Afterwich, the loan on the on the full purchase price is typically spread over five or six years, resulting in significantly higher monthly payments.
And the winner is ...
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.
