Employer Provided Automobiles May Be A Taxable Benefit
The Income Tax Act specifies that there is to be included in income of a taxpayer the value of board, lodging and other benefits of any kind whatsoever, received or enjoyed by the taxpayer by virtue of an office or employment (which can include shareholders). This definition in the Act is broad but not very clear in certain circumstances.
There are onerous and detailed rules where an employer provides an employee or shareholder with the use of an employer owned or leased vehicle. For certain Automobiles defined HERE, the result is a complex calculation involving a standby charge and an operating cost benefit calculation (note that if you are a Partner in a Partnership, only the standby charge is applicable. Partners are not taxed on operating cost benefits). These calculations can result in a high amount of benefits charged to the employee or shareholder which are taxed as employment income subject to the usual withholding tax. This can result in the employee/shareholder paying a large tax bill. For clearly marked police cars and fire emergency vehicles, there is a complete exclusion from any benefit calculation whatsoever. Also, the standby charge and operating cost benefit calculation for employees and shareholders does not apply to the Automobile definition exclusions. But, if the automobile is excluded, CRA may still apply a general benefit based on "benefits of any kind whatsoever" rule described above. In this case, there is no prescribed way to calculate the benefit and the facts of the situation would dictate whether or not a benefit is actually enjoyed by the taxpayer. For Partners, if the automobile is excluded then there is no benefit calculated for the use of a Partnership owned or leased vehicle.
Operating Cost Benefit Calculation
CRA has indicated that all expenses associated with an automobile are operating costs. When the employer pays these costs the employee or shareholder (but not Partners) may enjoy a benefit based on the personal use of the vehicle. There are two optional ways to calculate the benefit and both calculations are reduced by amounts repaid by the employee/shareholder within 45 days of the end of the calendar year to which the costs relate:
Standby Charge Benefit Calculation
CRA has a formula calculation of the standby charge benefit and it applies to employees, shareholders, and partners. The concept is that the taxpayer enjoys a benefit from merely having an automobile available for use - regardless of whether it was actually used.
The benefit is calculated monthly at 2% of the original capital cost of the vehicle per month or 2/3 of the lease cost of the vehicle per month for each month the vehicle is made available for use to the employee. The result of this calculation can be reduced on two conditions:
If both of the above conditions exist, then the standby charge is multiplied by a fraction as follows:
1,667 X number of months made available
The fraction, depending on the circumstances, can reduce the standby charge.
CRA expects taxpayers to maintain detailed travel logs to backup the calculations of all benefits. Failure to keep a log will result in CRA applying their own judgement on the calculation which may not be favourable to the taxpayer. If you are claiming automobile expenses relating to the use of your vehicle at work, you must maintain a log book indicating the total kilometres you drove in the year and the kilometres you drove to earn employment income. The log book should also contain the date, destination, and the distance traveled for each trip. Make sure that you record the odometer reading of the vehicle at the beginning and end of each year.
For taxpayers who are primarily engaged in leasing or selling vehicles, the standby charge amount of 2% per month is reduced to 1.5% of the average cost of automobile inventory acquired by the employer during the year.
There are tax planning opportunities to mitigate the problem of taxable automobile benefits discussed HERE.
Employee/Shareholder benefits are a complicated area and a Chartered Accountant should be consulted. Contact Keith Anderson CA at (780) 447-5830 if you need advice.